Hull City Council Affordable Housing Viability Assessment Final Report

Hull City Council Affordable Housing Viability Assessment Final Report Dr Andrew Golland BSc (Hons) PhD, MRICS drajg@btopenworld.com July 2011

1 INTRODUCTION Background to the Study 1.1 Hull CC appointed Three Dragons to undertake an affordable housing viability study covering a range of housing market circumstances across the City. The work was overseen by the Council s own Steering Group. 1.2 The broad aims of the study were to consider an appropriate target or targets for the authority, as well as to advise on an appropriate threshold or thresholds in the light of the varying local market and land supply conditions. 1.3 This report relates to the specific circumstances of Hull although considers in the wider context regional and national viability benchmarks. The report analyses the impact of affordable housing and other planning obligations on scheme viability. Policy context - national 1.4 This study focuses on the percentage of affordable housing sought on mixed tenure sites and the size of site from above which affordable housing is sought (the site size threshold). National planning policy, set out in PPS3 makes clear that local authorities, in setting policies for site size thresholds and the percentage of affordable housing sought, must consider development economics and should not promote policies which would make development unviable. PPS3: Housing (November 2006, Updated June 2010) states that: In Local Development Documents, Local Planning Authorities should: Set out the range of circumstances in which affordable housing will be required. The national indicative minimum site size threshold is 15 dwellings. However, Local Planning Authorities can set lower minimum thresholds, where viable and practicable, including in rural areas. This could include setting different proportions of affordable housing to be sought for a series of site-size thresholds over the plan area. Local Planning Authorities will need to undertake an informed assessment of the economic viability of any thresholds and proportions of affordable housing proposed, including their likely impact upon overall levels of housing delivery and creating mixed communities. (Para 29) 1.5 The companion guide to PPS3 1 provides a further indication of the approach which Government believes local planning authorities should take in planning for affordable housing. Paragraph 10 of the document states: Effective use of planning obligations to deliver affordable housing requires good negotiation skills, ambitious but realistic affordable housing targets and thresholds given site viability, funding cascade agreements in case grant is not provided, and use of an agreement that secures standards. (our emphasis) 1 CLG, Delivering Affordable Housing, November 2006 Hull CC Final Affordable Housing Viability Report July 2011 Page 2

Policy context Yorkshire and Humberside 1.6 The Yorkshire and Humberside Plan, Regional Spatial Strategy (May 2008) has now been revoked. It stated that the Region needs to increase its provision of affordable housing. It stated that: 1.7 LDFs should set targets for the amount of affordable housing to be provided. Provisional estimates of the proportion of new housing that may need to be affordable are as follows: Over 40% in North Yorkshire districts and the East Riding of Yorkshire; 30% to 40% in Kirklees, Leeds, Wakefield and Sheffield Up to 30% in other parts of South and West Yorkshire, Hull, North Lincolnshire and North East Lincolnshire. Policy context Hull CC 1.8 The Council s current policy is set out in the Adopted Local Plan of May 2000. 1.9 This states that (Para 9.17): A community s need for affordable housing is now recognised as a material planning consideration. Although other agencies are involved, the planning system s role in securing suitable land for affordable housing is an increasingly important one. The City Council will encourage the provision of affordable housing in appropriate locations. 1.10 The Plan further states that (Para 9.23): In addition to Housing Associations, affordable housing can be secured by appropriate land sales and negotiations with developers or by encouraging shared ownership schemes. Most housing sites are suitable for affordable housing. The Council will, in appropriate cases, negotiate with developers to secure a suitable number of units. 1.11 Thus the policy position is currently one of broad guidance only and the purpose of this study is that firm up that position for the LDF. Research undertaken 1.12 There were four main strands to the research undertaken to complete this study: Discussions with a project group of officers from the commissioning authorities which informed the structure of the research approach; Analysis of information held by the authority, including that which described the profile of land supply; Use of the Three Dragons Toolkit to analyse scheme viability (and described in detail in subsequent chapters of this report); Hull CC Final Affordable Housing Viability Report July 2011 Page 3

A workshop held with developers, land owners, their agents and representatives from a selection of Registered Social Landlords active in the district. A full note of the workshop is shown in Appendix 1. Structure of the report 1.18 The report adopts the following structure: Chapter 2 explains the methodology we have followed in, first, identifying sub markets and, second, undertaking the analysis of development economics. We explain that this is based on residual value principles; Chapter 3 provides analysis of residual values generated across a range of different development scenarios (including alternative percentages and mixes of affordable housing) for a notional 1 hectare site. Chapter 4 considers options for site size thresholds. It reviews national policy and the potential future land supply and the relative importance of small sites. The chapter considers practical issues about on-site provision of affordable housing on small sites and the circumstances in which collection of a financial contribution might be appropriate (and the principles by which such contributions should be assessed); Chapter 5 identifies a number of case study sites (generally small sites which are currently in use), that represent examples of site types found in the authority. For each site type, there is an analysis of the residual value of the sites and compares this with their existing use value. Chapter 6 summarises the evidence collected through the research and provides a set of policy options. Chapter 7 looks at the findings of the study in the context of the long terms housing and land market trends. Hull CC Final Affordable Housing Viability Report July 2011 Page 4

2 METHODOLOGY Introduction 2.1 In this chapter we explain the methodology we have followed in, first, identifying sub markets (which are based on areas with strong similarities in terms of house prices) and, second, undertaking the analysis of development economics. The chapter explains the concept of a residual value approach and the relationship between residual values and existing/alternative use values. Viability starting points 2.2 We use a residual development appraisal model to assess development viability. This mimics the approach of virtually all developers when purchasing land. This model assumes that the value of the site will be the difference between what the scheme generates and what it costs to develop. The model can take into account the impact on scheme residual value of affordable housing and other s106 contributions. 2.3 Figure 2.1 below shows diagrammatically the underlying principles of the approach. Scheme costs are deducted from scheme revenue to arrive at a gross residual value. Scheme costs assume a profit margin to the developer and the build costs as shown in the diagram include such items as professional fees, finance costs, marketing fees and any overheads borne by the development company. 2.4 The gross residual value is the starting point for negotiations about the level and scope of s106 contribution. The contribution will normally be greatest in the form of affordable housing but other s106 items will also reduce the gross residual value of the site. Once the s106 contributions have been deducted, this leaves a net residual value. Hull CC Final Affordable Housing Viability Report July 2011 Page 5

Figure 2.1 Theory of the Section 106 Process 2.5 Calculating what is likely to be the value of a site given a specific planning permission, is only one factor in deciding what is viable. Also highly important is the financial relationship between residual value and Existing Use or Alternative Use values. 2.6 The diagram below shows how this operates in theory. Residual value (RV) falls as the proportion of affordable housing increases. At point (a), RV is greater than the Existing Use Value (EUV) and provided that this margin is sufficient for the land owner to bring the site forward, then it will be viable. Hull CC Final Affordable Housing Viability Report July 2011 Page 6

2.7 At point (b) the RV is equal to the EUV and there is relatively little incentive in theory to bring the site forward. 2.8 Beyond points (a) and (b), the scheme will not come forward as the developer will not be able to pay the land owner enough relative to the land owner s EUV. 2.9 Where grant is available (points (c) and (d)), viability for affordable housing enhanced. Up to point (c) RV is greater than EUV and there is a land owner incentive. At point (c) RV is equal to EUV and so, whilst a higher affordable housing contribution is likely than say at point (b), in principle the land owner is in exactly the same position as at (b). 2.10 At point (d), the scheme will not be viable even with grant. 2.11 Under all circumstances, the Council will need to consider whether a realistic and justifiable AUV (Alternative Use Value) applies. Where the AUV is higher than the EUV, and can be justified, then the AUV becomes the appropriate threshold value against which RV is judged. Hull CC Final Affordable Housing Viability Report July 2011 Page 7

3 HIGH LEVEL TESTING Introduction 3.1 This chapter of the report considers viability for mixed tenure residential development for a number of different proportions and types of affordable housing. The analysis is based on a notional 1 hectare site and has been undertaken for a series of sub markets that have been identified. The chapter explains this and explores the relationship between the residual value for the scenarios tested and existing/alternative use values. Market value areas 3.2 Variation in house prices will have a significant impact on development economics and the impact of affordable housing on scheme viability. 3.3 We undertook a broad analysis of house prices in the Hull CC area using HM Land Registry data to identify the sub markets. The house prices which relate to the sub markets provide the basis for a set of indicative new build values as at March 2011. Table 3.1 below sets out the sub markets in the City developed for the study. The sub markets were agreed with the local authority. Hull CC Final Affordable Housing Viability Report July 2011 Page 8

Table 3.1 Viability sub markets in the Hull CC area Source: Market value areas as agreed between Three Dragons and Hull CC Hull CC Final Affordable Housing Viability Report July 2011 Page 9

The map below shows the sub market areas in GIS format: Source: Market value areas as agreed between Three Dragons and Hull CC Hull CC Final Affordable Housing Viability Report July 2011 Page 10

Testing assumptions (notional one hectare site) 3.4 For the viability testing, we defined a number of development mix scenarios, using a range of assumptions agreed with the Council. The scenarios were based on an analysis of typical development mixes and were discussed at the stakeholder workshop. 3.5 The development mixes tested were: 20 dph: including 5% 3 bed terraces; 25% 3 bed semis; 25% 3 bed detached; 20% 4 bed detached; 15% 5 bed detached; 10% 3 bed bungalow; 30 dph: including 5% 2 bed terraces; 10% 3 bed terraces; 30% 3 bed semis; 25% 3 bed detached; 15% 4 bed detached; 5% 5 bed detached; 10% 3 bed bungalow; 40 dph: including 5% 2 bed flats; 15% 2 bed terraces; 25% 3 bed terraces; 25% 3 bed semis; 20% 3 bed detached; 10% 4 bed detached; 50 dph: including 5% 2 bed flats; 15% 2 bed terraces; 30% 3 bed terraces; 25% 3 bed semis; 20% 3 bed detached; 5% 4 bed detached; 3.6 We calculated residual scheme values for each of these (base mix) scenarios in line with a further set of tenure assumptions. These were 0%; 5%; 10%; 15%; 20% and 25% affordable housing. These were tested at 80% Social Rent and 20% Affordable Rent in each case. An 80%:20% split was agreed with the Council as being a likely scenarios going forward. All tests were carried out without grant. 3.7 We tested all sub markets as set out in table and map above. Other s106 contributions 3.8 For the modelling we have undertaken (and unless shown otherwise) we have assumed that other planning obligations have a total cost of 1,500 per unit. Residual values for a notional one hectare site 3.9 This section looks at a range of development mixes and densities. It shows the impacts of increasing the percentage of affordable housing on residual site values. The full set of results is shown in Appendix 3. Hull CC Final Affordable Housing Viability Report July 2011 Page 11

Lower density housing (20 dph) 3.10 Figure 3.1 shows low density housing (20dph) and the residual values for each of the higher (6) market value areas outlined in Section 3. Figure 3.1 Low density housing (20 dph) Residual value in s million Figure 3.1 shows the range of residual values in the higher value locations across the Hull CC area at 30 dwellings per hectare. In general, the City does not produce high residual values (as will be shown by further analysis), although it is important to note that there are significant variations in residual value between sub markets even at the higher end of the scale (as shown in Figure 3.1). In a location such as Kingswood (third highest sales values in the Hull CC area), residual value at 15% affordable housing is around 250,000 per hectare. In the City centre a similar scheme would generate around 500,000 per hectare. At the lower end of the scale a 15% affordable housing contribution is likely to generate a negative residual value. The affordable housing contribution would need to fall to less than 10% in Western Suburbs for residual value to be routinely positive. This does not mean that modest affordable housing contributions will always make scheme unviable in these lower value locations (we assess here only the most expensive six sub markets), but that where an affordable housing contributions is likely to be viable, the Council will be looking at a site where prices are higher than the norm for that area. The range in values has potentially important implications for policy making. With the scenarios tested, residual values at 25% affordable housing in the City Centre sub market are double those in the Western Suburb at nil affordable housing. These differences are highly significant in viability terms. Hull CC Final Affordable Housing Viability Report July 2011 Page 12

Medium density housing (30 dph) 3.11 Figure 3.2 shows lower density housing (30 dph) and the residual values for each of the higher (6) market value areas. Figure 3.2 Medium density housing (30 dph) Residual value in s million A similar (with the 20 dph scenario) pattern of residual values is shown at 30 dph. There is still a significant difference in residual value between higher and lower value locations. For example, a 25% affordable housing contribution in Newland and Avenue for example, will generate a very similar residual value to a nil % affordable housing contribution in Victoria Dock. The impact of increased density varies between market areas and at different levels of affordable housing. What happens between 20 dph and 30 dph, is that the higher value areas (City Centre and Newland and Avenue) see higher residual values at 30 dph than 20 dph. At the lower end of the scale (Haworth Park and Inglemire, Victoria Dock and Western Suburbs) residual values are lower at 30 dph than 20 dph. The tipping point in terms of this switch is Kingswood at 5% affordable, where residual value with affordable housing is higher at 30 dph than 20 dph, but at 5% affordable housing, the 20 dph generates a marginally higher residual value (see also Appendix 3) The reason for the divergence in residual value between higher and lower value locations is that developers building smaller units in weaker sub markets are likely to find it disproportionately difficult to cover development costs with the revenue generated. Hull CC Final Affordable Housing Viability Report July 2011 Page 13

Medium higher density housing (40 dph) 3.12 Figure 3.3 shows residual values for a (40 dph) scheme and the residual values for each of the market value areas outlined earlier. Figure 3.3 Medium density housing (40 dph) Residual value in s million With the exception of a scheme with no affordable housing in the City Centre sub market, residual value is lower at 40 dph than at 30 dph in all scenarios (Appendix 3). This is consistent with the finding in the previous section that higher density does not necessarily increase residual value and hence viability. The chart (Figure 3.3) shows that this type of scheme produces negative values in the Western Suburbs and in most instances in Haworth Park and Inglemire and Victoria Dock. The chart (Figure 3.3) now shows very significant negative residual values in the weakest two sub markets. At 20% affordable housing in Victoria Dock for example, site values of around 500,000 negative residual value are occurring. Hull CC Final Affordable Housing Viability Report July 2011 Page 14

Higher density housing (50 dph) 3.13 Figure 3.4 shows residual values for a (50 dph) scheme and the residual values for each of the sub markets as previously. Figure 3.4 Higher density housing (50 dph) Residual value in s million 3.14 The 50 dph scenario provides reasonably consistent findings. In the higher value locations at lower proportions of affordable housing, residual value rises (from 40dph to 50 dph) and in the lower value locations residual value falls from 40 dph to 50 dph, and more so at higher proportions of affordable housing. 3.15 Indeed, the analysis suggests (Figures 3.1 to 3.4) that lower density in the Hull area is likely to generate the highest residual values. By this is meant that the range 20 dph to 30 dph is probably going to be the best way to optimise residual value. 3.16 This conclusion depends of course entirely on what development unit mix is assumed. This may vary from one location to another and will certainly vary from site to site. The Council should therefore bear in mind when negotiating sites, the sensitivity of viability not only to the proportion of affordable housing, but also to the development mix itself. Residual values in lower value areas 3.17 It will be noted that in the lowest of the higher value areas looked at in Figures 3.1 to 3.4, residual values including affordable housing generate are negative. To make a meaningful analysis of the lower value areas in the Hull City District, we need to increase selling prices in order to generate positive residual values. 3.18 Figure 3.5 below shows residual values for four further sub markets: Hull North East, Inner Core, Bransholme and Hull East. Residual values are calculated for a 30 dph scheme which generates amongst the highest residual values. Hull CC Final Affordable Housing Viability Report July 2011 Page 15

3.19 Selling prices for these locations are assumed to be 20% higher than the indicative new build prices for today (March 2011). All other variables (build costs and rents) are held constant (i.e. at March 2011 values). Figure 3.5 Residual values: Hull North East, Inner Core, Bransholme and Hull East 3.20 Figure 3.5 shows a significant range of values across these four sub markets. As previously, a relatively high affordable housing contribution in a (relatively) higher value location is similar only to a much lower contribution in a relatively lower value sub market. 3.21 At 10% affordable housing, all sub markets generate a positive residual value based on a 20% increase in prices. It should be noted however that even assuming a price increase, whilst holding the other viability variables constant, negative residual values are generated in all these sub markets at the higher percentages of affordable housing. 3.22 Thus these sub markets will require a significant improvement in selling prices before they can routinely deliver affordable housing. This does not mean all sites cannot deliver affordable housing now; some sites, being relative hot spots may deliver affordable housing in current circumstances. 3.23 Figure 3.6 shows residual values for the three lowest value sub markets in the Hull CC District. Residual values in this chart are based on an assumption of a 40% increase in house prices, whilst holding all other variables (costs and rents) constant. 3.24 This is clearly a very significant price increase and on this basis we would expect most sites in these locations to be unviable in the current market circumstances. 3.25 As previously (Figure 3.5), even higher prices do not necessarily deliver positive residual values. These particular locations would require prices increases in excess of 40% to deliver affordable housing in any routine way. Hull CC Final Affordable Housing Viability Report July 2011 Page 16

Figure 3.6 Residual values: New Cleveland, Greenwood and Na SA & Thornton Street 3.26 We would emphasise the point made earlier that there will be relative hot spots in these locations and hence, despite the likelihood that schemes will prove routinely unviable, there may be instances where, subject to site specific testing, a modest affordable housing contribution is possible. Impacts of potential grant funding 3.27 The foregoing analysis is based on a no grant assumption. Going foward over the Plan period, this is probably the most proper assumption to make. The Council was to have delivered schemes within its Housing Market Renewal areas, although this source of funding has been significant curtailed along with the significant cuts in HCA grant for affordable housing. 3.28 The changed policy at national level may to some extent benefit Hull however. Although in most circumstances, grant will be used to support Affordable Rent, the gap in rent level between this and Social Rent in the context of Hull CC is not significant. That stated, incomes are very low in the City and Social Rent looks likely to remain the most appropriate form of affordable housing to deliver if local needs are to met. 3.29 The availability of public subsidy (in the form of grant) can have a significant impact on scheme viability. Grant given to the affordable housing providers enables them to pay more for affordable housing units, thus increasing overall scheme revenue and therefore the residual value of a mixed tenure scheme. 3.30 We have tested the impacts of grant on development here assuming grant of 50,000 per Social Rented unit and 15,000 per Intermediate unit. This level of grant is based on feedback from a range of studies as being a reasonable figure to use for viability testing purposes. 3.31 For our testing, we have tested the impact of grant on residual values for a 1 Ha site at 30 dph for five selected locations across the Borough. The results are shown in Table 3.2. Hull CC Final Affordable Housing Viability Report July 2011 Page 17

Table 3.2 30 Dph 5% AH 10% AH 15% AH 20% AH City Centre No grant Comparison of impact of grant versus on residual values (at 30 dph): Residual Value ( s million per hectare); 80% Social Rent: 20% Intermediate Rent Grant Kingswood No grant Grant Western Suburbs No grant Grant Hull North East* No grant Grant Greenwood** No grant Grant 0.91 0.97 0.44 0.51-0.06 0.00 0.42 0.48 0.22 0.28 0.75 0.88 0.31 0.44-0.17 0.39 0.29 0.42 0.10 0.23 0.59 0.78 0.17 0.36-0.28 0.28 0.15 0.34-0.03 0.51 0.43 0.69 0.04 0.30-0.39 0.52 0.02 0.28-0.15 0.39 *Prices increased by 20%; **Prices increased by 40% 3.32 Table 3.2 shows that the availability of grant will enhance site viability. In the case of Hull CC, we feel that it will be most effective in helping to bring forward sites in middle market locations such as the Western Suburbs and Hull North East. 3.33 In the lowest value areas, very substantial grant, more than is typically provided for affordable housing will be needed. Therefore grant is probably most efficiently invested in bringing marginal sites forward, rather than ones which are beyond being marginal. 3.34 That being stated, if grant is available it may be helpfully directed towards sites in higher value areas. That is because prices in Hull are generally low, and cold spots in higher value areas may still require grant. 3.35 In terms of grant impacts, the best mathematical returns are achieved in the lowest value areas. However, as stated, where the absolute residual are so low, this mathematical advantage may be spurious. Impacts of increasing the proportion of Intermediate housing within the affordable element 3.36 In the previous section we considered the impact of grant on scheme viability. Where grant is not available to support schemes (or is not sufficient on its own), scheme viability can be enhanced by increasing the percentage of intermediate affordable housing. We have tested all scenarios thus far assuming the relevant affordable element is split 80% Social Rent and 20% Affordable Rent. Here we test a 50%:50% split in the affordable element. Table 3.3 Site values ( million per hectare) for a 30 dph scheme comparing 50% Social Rent and 50% Affordable Rent without grant versus grant option (80% Social Rent and 20% Affordable Rent) 30 City Centre Kingswood Western Hull North East* Greenwood** Hull CC Final Affordable Housing Viability Report July 2011 Page 18

Dph 5% AH 10% AH 15% AH 20% AH Suburbs 50%:50% Grant 50%:50% Grant 50%:50% Grant 50%:50% Grant 50%:50% Grant 0.91 0.97 0.45 0.51-0.05 0.00 0.42 0.48 0.30 0.28 0.77 0.88 0.32 0.44-0.15 0.39 0.30 0.42 0.18 0.23 0.61 0.78 0.19 0.36-0.25 0.28 0.17 0.34 0.06 0.51 0.46 0.69 0.07 0.30-0.35 0.52 0.05 0.28-0.06 0.39 *Prices increased by 20%; **Prices increased by 40% 3.37 Table 3.3 shows the residual values with a 50%:50% split in the affordable element. A 50%:50% split within the affordable housing element will increase residual values (as against the 80%:20% split). However, its effectiveness, as against using grant will vary according to location. 3.38 In general, increasing the Affordable Rent from a 20% basline position to 50%, will not make a significant difference. A comparsion of Tables 3.2 and 3.3 will show that for example, at 15% affordable housing in the City Centre residual value is 0.61 million per hectare. At the (80%:20%) baseline, it is 1.59 million per hectare; increasing the Affordable Rent element adds only 3% to residual value. In Hull North East (as a lower value area), the impact is similar; i.e a neglible increase in residual value. 3.39 Table 3.3 shows that the substitute effect (from Social to Affordable Rent) does not compensate for the effects of grant. A more sitgnificant change (eg to 80% Affordable Rent) may be needed before any significant change in residual value is seen. 3.40 We have tested here Affordable Rent as the main Intermediate product. Where Shared Ownership (New Build HomeBuy) is the Intermediate Affordable product this is likely to have a more beneficial substitution effect. This will be particularly the case in the middle to higher value areas of the City. Alternative costs to a scheme - A higher planning gain package and additional Codes (for Sustainable Homes) 3.41 Schemes could incur alternative costs for a number of reasons. One is a higher level of Section 106 obligations (over and above affordable housing); another is additional costs for the Code for Sustainable Homes. 3.42 The baseline testing has been carried out at a CIL contribution of 1,500 per unit. However, a higher cost is not unforeseeable. On the basis of a 30 dph scheme, a higher ( 5,000 per unit) levy would generate additional costs of some 105,000 per hectare. Hull CC Final Affordable Housing Viability Report July 2011 Page 19

3.43 The impact of the Code for Sustainable Homes (moving from Level 3 to Level 4) will be higher (i.e around 150,000 per hectare). These costs are estimated, according to recent DCLG research at around 5,000 per unit (to move from Level 3 to Level 4). 3.44 Additional costs of this quantum would hit viability in Hull to a significant extent, although particularly in the weaker sub markets. 3.45 These costs are however unlikely to occur in isolation. Cost rise historically have always been accompanied by greater rises in prices and scheem revenue. As this is also not gauranteed over the Plan period, we suggest that the Council monitor viability on a scheme by scheme basis, weighing the relative benefits of affordable housing, community infrastructure and sustainable build. Benchmarking results 3.46 There is no specific guidance on the assessment of viability which is published by national government. The setting of affordable housing targets should we feel, be based on a range of factors including residual value, the relationship between residual value and existing (alternative where relevant) value, delivery, residual values in other authorities, and, the extent to which targets are ambitious as well as realistic (in line with the PPS3 Companion Guide on Affordable Housing). 3.47 In terms of benchmarks, the recent Valuation Office Property Market report shows that (mixed) agricultural land is currently (January 2011) selling for around 15,000 per hectare. Although Hull does not have many significant greenfield sites it does have locations such as Kingswood where the uplift from existing use will be significant when residential development is given permission. 3.48 Much of the land within Hull is in industrial use. The Property Market Report of the Valuation Office for July 2009 (the most recent data for Hull) suggests industrial land at around 450,000 per hectare. Given the downturn in the economy since then, these values may have fallen. However, this is on the back of a situation where industrial land is likely to remain in demand. The Hull Employment Land Review (2008) concluded that There is a perceived lack of land available within the Hull city boundary for the development of new industrial accommodation. This is likely to mean some upward pressure on land values. 3.49 That being stated, residential opportunities will remain for sites that have reached the end of their economic life either in terms of their locational or functional roles. These sites may only have very nominal existing use values and may be developed for housing or indeed other uses. Hull CC Final Affordable Housing Viability Report July 2011 Page 20

4 LAND SUPPLY, SMALL SITES AND USE OF COMMUTED SUMS Introduction 4.1 This chapter reviews the policy context and options for identifying the size of sites above which affordable housing contributions would be sought, in the national policy context. The national policy is set out in PPS3 and requires an affordable housing contribution on sites with a capacity of 15 or more units or where the sites in 0.5 hectares of greater. 4.2 The chapter provides an assessment of the profile of the future land supply and the likely relative importance of small sites. It then considers practical issues about on-site provision of affordable housing on small sites and the circumstances in which collection of a financial contribution might be appropriate (and the principles by which such contributions should be assessed). Purpose of the Analysis 4.3 PPS3 Housing sets out national policy on thresholds and affordable housing and states: The national indicative minimum site size threshold is 15 dwellings. However, Local Planning Authorities can set lower minimum thresholds, where viable and practicable, including in rural areas. This could include setting different proportions of affordable housing to be sought for a series of site-size thresholds over the plan area. (Para 29) 4.4 By reducing site size thresholds and capturing more sites from which affordable housing can be sought, an authority can potentially increase the amount of affordable housing delivered through the planning system. 4.5 In this section we examine the impact that varying site size thresholds might have on affordable housing supply. In order to do this we need to examine the likely future site supply profile. Small sites analysis 4.6 We have analysed data on the City Council s Housing Land Database (HLD) (as at 31 st March 2011). This provides a picture of the balance of supply relative to size of site. The overall picture is shown in Table 4.1 below: Hull CC Final Affordable Housing Viability Report July 2011 Page 21

Table 4.1: Overall site supply (HLD, Hull CC: March 2011) Site Size No of Dwellings % of Total 1 to 4 188 1.86 5 to 9 284 2.81 10 to 14 132 1.31 15 to 24 271 2.68 25 to 49 334 3.31 50 to 100 694 6.87 > 100 8199 81.16 10102 100.00 Source: Hull CC 4.7 Table 4.1 suggests that 6% of all supply (as per the database) will be delivered on sites below the national threshold of 15 units. Moreover, less than 10% of all dwellings will be delivered on sites of less than 25 dwellings. This is an unusual picture compared to many local authorities which rely to a significant on smaller sites to deliver housing. It means that to deliver substantial affordable housing (subject to viability) there is not a particularly pressing need to reduce the threshold below the national guidance level. 4.8 Figure 4.1 looks at the picture of site supply by sub market across the Hull CC area. Figure 4.1 Housing supply by site size: Hull CC area Hull CC Final Affordable Housing Viability Report July 2011 Page 22

4.9 Figure 4.1 shows a significant variation between different sub markets 4.10 There are very few sub markets with a significant reliance on small sites. Only New Cleveland has total reliance on sites with a capacity of between one and four dwellings. Given that a total capacity of three dwellings is shown for this sub market, this is an insignificant finding. Newland and Avenue and Greenwood are the only two sub markets to have any substantial proportion of supply from smaller (one to four dwellings) sites. In the case of Newland and Avenue, 21% of all supply is from sites with a capacity of one to four dwellings. For Greenwood, the commensurate figure is 9%. Neither of these sub markets makes a significant contribution to overall dwelling supply however. 4.11 Several sub markets have a high reliance on large sites (with a dwelling capacity of more than 100 homes). Victoria Dock (Figure 4.1) is an obvious example with 99% of capacity on sites of over 100 dwellings. Kingswood (98%) is another. Other sub markets where large sites predominate area: N and St A & Thornton Street (92% of all supply on sites with a dwelling capacity greater than 100 homes) City Centre (43%), Western Suburbs (89%), North East Hull (75%), Inner Core (43%) and Bransholme (66%). 4.12 Only a few sub markets are relatively evenly balanced between small, medium and large sites. The Inner Core and Hull East are the best examples. 4.13 The spread of site sizes across the sub markets has important implications for policy setting. Clearly, there is little practical advantage in having a low affordable housing threshold in locations where homes will be built on large sites as affordable housing will then be caught by the national (PPS3) threshold. 4.14 There are however (Figure 4.1) a number of sub markets where a low threshold may benefit affordable housing delivery. Most obviously these include Newland and Avenue, Hull East, Greenwood and Inner Core. These sub markets have respectively, 62%, 40%, 30% and 24% of dwelling capacity on sites of less than 15 dwellings. 4.15 In principle it may be appropriate to have a lower threshold in these locations. However, also important is the question as to whether these areas will deliver a significant proportion of housing overall. We return to this question in the conclusions to this report. Use of commuted sums 4.13 As a general principle, we recognise that seeking on-site provision of affordable housing will be the first priority and that provision of affordable housing on an alternative site or by way of a financial payment in lieu (or Hull CC Final Affordable Housing Viability Report July 2011 Page 23

commuted sum) should only be used in exceptional circumstances. This position is consistent with national guidance in Paragraph 29 of PPS3 which states: In seeking developer contributions, the presumption is that affordable housing will be provided on the application site so that it contributes towards creating a mix of housing. However, where it can be robustly justified, off-site provision or a financial contribution in lieu of on-site provision (of broadly equivalent value) may be accepted as long as the agreed approach contributes to the creation of mixed communities in the local authority area Para 29. 4.14 Where commuted sums are sought as an alternative to direct on or off-site provision, PPS3 (para 29) sets out the appropriate principle for assessing financial contributions - that they should be of broadly equivalent value 4.15 Our approach is that the commuted sum should be equivalent to the developer/landowner contribution if the affordable housing was provided on site. One way of calculating this is to take the difference between the residual value of 100% market housing and the residual value of the scheme with the relevant percentage and mix of affordable housing. 4.16 If the equivalence principle is adopted, then the decision of the local authority to take a commuted sum will be based on the acceptability or otherwise of onsite provision as a housing and spatial planning solution. 4.17 Any concerns about scheme viability (whatever size of site) should be reflected by providing grant or altering tenure mix, or by a reduced affordable housing contribution whether provided on-site, off-site or as a financial contribution. Other planning obligations may also need to be reduced under some circumstances. 4.18 However, if affordable housing is sought from very small sites, in certain circumstances it becomes impractical to achieve on site provision e.g. seeking less than 33% on a scheme of 3 dwellings or less than 50% with a scheme of 2 dwellings. There will also be occasions where on-site provision can only deliver a partial contribution towards the proportion of affordable housing sought e.g. 40% affordable housing in a scheme of 3 dwellings would deliver one affordable unit on site (representing 33% of provision). In the latter case, it is possible to devise a formula which mixes on-site provision with a commuted sum to make up the balance. Hull CC Final Affordable Housing Viability Report July 2011 Page 24

5 CASE STUDY VIABILITY ANALYSIS 5.1 The analysis in Chapter 3 provides a good indication of the likely viability of sites in the City. The residual values provide a reasonable indication of scheme viability and can be compared with appropriate benchmarks. 5.2 The analysis in Chapter 3 will apply for large as well as small sites (on a pro rata basis). We do not have any evidence to suggest that the economics change significantly between large and small sites. The workshop and its feedback process failed to provide evidence to suggest that small sites systematically present a particular viability challenge. This has been the case elsewhere where we have run similar workshops. 5.3 We look here however at a number of case studies based on a range of smaller schemes to understand better the economics of development. Case study sites 5.4 In this section, we review a number of case study developments which we believe are fairly typical based on the Council s assessment of housing supply: the database used for the analysis in Chapter 4. 5.5 On the basis of the data we have selected four case studies for further investigation. These are shown in Table 5.1. Table 5.1 Case study sites Case Study No of dwellings Type of new development Site Size (Ha) Dph A 1 1 x 4 bed detached house 0.05 20 B 2 1 x 3 bed detached house; 1 x 4 bed detached house C 4 2 x 3 bed semis; 2 x 4 bed detached D 8 2 x 2 bed flats 4 x 3 bed terraces 2 x 4 bed detached 0.08 25 0.125 32 0.15 53 5.6 For each case study we have undertaken an analysis of residual values for the five highest value sub markets and at levels of affordable housing from 0%; 5%; 10% and 15%. All the other assumptions used are the same as for the main analysis described in Chapter 3. Hull CC Final Affordable Housing Viability Report July 2011 Page 25

Case study A Develop one detached houses on a 0.05 ha site 5.7 The first scenario assumes the development of one detached house. The results, with the affordable housing impacts are shown in Table 5.2: Table 5.2 Develop one detached house Case A 0% 5% 10% 15% City Centre 80,000 73,000 64,000 57,000 Newland and Avenue 1.60 1.46 1.28 1.14 73,000 66,000 57,000 49,000 1.46 1.32 1.14 0.98 Kingswood 61,000 55,000 46,000 40,000 1.22 1.11 0.92 0.80 Haworth Park and Inglemire 45,000 40,000 31,000 26,000 0.90 0.80 0.62 0.52 Western Suburbs 29,000 24,000 17,000 13,000 0.58 0.48 0.30 0.26 Table shows residual values in a selection of market value areas: the upper figure is the residual value for the scheme and the lower figure is the equivalent residual value per hectare (in s million) 5.8 Table 5.2 shows residual values at the different proportions of affordable housing. There are two values given for each scenario. The value above gives the absolute sum in pounds that a land owner will receive, and the figure below is the site value based on a per hectare equivalent calculation. All results show a positive residual value. 5.9 Significant residual values are achieved in the higher value areas, although plot values of around 25,000 are generated at 15% affordable housing in a location such as Haworth Park and Inglemire. 5.10 It will be noted that residual values on a per hectare basis are significantly higher than those generated using a notional one hectare site. This is less to do with site size, more to do with the unit type, this being a detached house which generates a good surplus over development cost. Case study B Develop two detached houses one three bed and one four bed. 5.11 The viability of developing two dwellings rather than one will depend on the site size and existing use value. There will be some instances where the relationship between existing use value and residual development value is favourable and some where this may not be the case. Table 5.3 shows residual values for the development of the two dwellings. Table 5.3 Develop two dwellings Hull CC Final Affordable Housing Viability Report July 2011 Page 26

Case A 0% 5% 10% 15% City Centre 130,000 115,000 101,000 86,000 Newland and Avenue 1.62 1.44 1.26 1.07 114,000 100,000 88,000 73,000 1.43 1.25 1.10 0.91 Kingswood 94,000 82,000 68,000 56,000 1.17 1.02 0.85 0.70 Haworth Park and Inglemire 66,000 54,000 44,000 32,000 0.82 0.67 0.55 0.40 Western Suburbs 38,000 28,000 18,000 8,000 0.47 0.35 0.22 0.10 Table shows residual values in a selection of market value areas: the upper figure is the residual value for the scheme and the lower figure is the equivalent residual value per hectare (in s million) 5.12 As is to be expected, Table 5.3 shows a considerable increase in residual value as a result of increasing the number of dwellings. However there is no significant increase in the pro rata per hectare value. 5.13 In terms of some sites, there could be an advantage in developing this scheme rather than a single dwelling in that the overall residual would be likely to cover the costs of say demolishing an existing dwelling. 5.14 Our experience from a number of studies suggests that where demolition occurs (of a single dwelling), a new development of at least four new homes will be needed before an affordable housing contribution is viable. Case study C Development of four houses two three bed semis and two four bed detached 5.15 Case study C assumes larger number of units, although the scheme is still small. We look here at the economics of developing two semis and two detached houses. Table 5.4 Develop four dwellings Case A 0% 5% 10% 15% City Centre 197,000 171,000 144,000 119,000 Newland and Avenue 1.58 1.37 1.15 0.95 173,000 149,000 123,000 99,000 1.38 1.19 0.98 0.79 Kingswood 117,000 96,000 73,000 51,000 0.94 0.77 0.58 0.41 Haworth Park and Inglemire 77,000 58,000 37,000 18,000 0.62 0.46 0.29 0.14 Hull CC Final Affordable Housing Viability Report July 2011 Page 27

Western Suburbs 30,000 13,000-6,000-22,000 0.24 0.10-0.05-0.18 Table shows residual values in a selection of market value areas: the upper figure is the residual value for the scheme and the lower figure is the equivalent residual value per hectare (in s million) 5.16 Table 5.4 shows that at the top end of the market residual values remain strong. For residential amenity land, the uplift in value is likely to be very significant. 5.17 However, for the middle value areas considered (e.g. Kingswood) residual value on a pro rata basis falls relative to Case Studies A and B once affordable housing is introduced. In Western Suburbs, we begin to see negative residual values at 10% and 15% affordable housing. 5.18 This occurs because a higher percentage of smaller units (e.g. semis) are included within the scheme. The conclusion suggests that development mix, not size of scheme, is most significant (alongside location) in determining residual value. Case study D Development of 8 dwellings on a 0.13 Ha site 5.19 Case Study D looks at a scheme of eight dwellings including flats, terraces and detached houses: two, two bed flats, four, three bed terraces and two, four bed detached. This is at higher density (53 dph). Table 5.5 shows the results from this analysis. Table 5.5 Develop eight dwellings Case A 0% 5% 10% 15% City Centre 241,000 199,000 156,000 113,000 Newland and Avenue 1.61 1.33 1.04 0.75 201,000 160,000 120,000 79,000 1.34 1.07 0.80 0.53 Kingswood 138,000 100,000 63,000 25,000 0.92 0.67 0.42 0.17 Haworth Park and Inglemire 58,000 25,000-9,000 43,000 0.39 0.17-0.06-0.29 Western Suburbs - 21,000-51,000-81,000-110,000-0.14-0.34-0.54-0.73 Table shows residual values in a selection of market value areas: the upper figure is the residual value for the scheme and the lower figure is the equivalent residual value per hectare (in s million) 5.20 As can be seen from the four dwelling scheme, the impact of higher density development is to reduce residual values. This is particularly the case (Table 5.5) in the lower value areas. Hull CC Final Affordable Housing Viability Report July 2011 Page 28

5.21 This is because, in essence, smaller units (here flats and terraces) are included as a significant proportion of the scheme. Commentary on the results 5.12 This section on small scheme case studies demonstrates that very small schemes can generate significant residual value. Where the scheme involves one or two detached dwellings, then it is likely that higher (pro rata) residual values will be achieved 5.13 As with the high level testing, viability will depend very much on the relationship between residual value and existing use value. Given the range of circumstances prevailing across small sites the Council will need to maintain a flexible approach on both small and larger sites considering this important relationship. The Affordable Housing Toolkit will be instrumental in supporting this process. 5.14 Overall, the case studies do not show that there is a particular viability challenge that does not otherwise apply on large sites. In fact the analysis here demonstrates that viability is much more a function of location and development density and mix than it is of site size. Increasing site size does not lead to more viable outcomes 5.15 We suggest that upwards of five new units may be needed where one is demolished or lost, in order to make scheme viable with affordable housing. Hull CC Final Affordable Housing Viability Report July 2011 Page 29

6 MAIN FINDINGS AND CONCLUSIONS Overview 6.1 In undertaking this viability study we have provided a comprehensive testing approach. This has involved two main types of analysis the analysis of viability using a notional 1 hectare site, and viability analysis looking at the economics of development on small sites. Our testing approach has considered a range of sub markets across the City, different density and development mix types, along with testing at different levels of affordable housing. We believe that this range and depth of analysis provides a very robust basis for the Council to establish policies for both affordable housing targets and thresholds in its future plans. Key findings 6.2 Our analysis identified thirteen sub market areas within the Hull City area. These sub markets are based on house price differentials across the City. They include the City Centre, Newland and Avenue, Kingswood, Haworth and Inglemire, Victoria Dock, Western Suburbs, North East Hull, Inner Core, Bransholme, Hull East, New Cleveland, Greenwood and Na SA and Thornton Street. 6.3 The City has a range of housing markets with significant variance in house prices. Relatively small differences in house prices lead to significant differences in the ability of specific areas to deliver affordable housing. 6.4 Viability is generally weak for the City as a whole. Very low house prices are unlikely to generate land value surplus from which Section 106 contributions may be obtained. There are large areas of the City which will require a significant increase in selling prices before they begin to look viable for affordable housing contributions. In some locations, we doubt housing is viable without Section 106 contributions. Relatively low development in these areas would seem to bear out in practice this hypothesis. 6.5 We believe however that by taking a sensitive approach to policy setting, some affordable housing is viable. Positive residual values are generated up to 15% affordable housing in the four highest value sub markets at 30 dph. One of these sub markets, Kingswood, is likely to contribute significantly to housing delivery in the next few years and we believe that this area, along with others should qualify for negotiations on affordable housing via the policy. 6.6 That stated, residual values remain relatively low, even in the higher value locations of the District. Our recommendations therefore are for only modest affordable housing contributions, as and when viability is proven on a site by basis. For several locations (the seven lowest sub market values), a significant increase in selling prices will be needed before affordable housing is routinely delivered. In the case of Hull North East, Inner Core, Bransholme and Hull East, we tested viability at prices 20% in excess of current. In the case of New Cleveland, Greenwood and Na SA and Thornton Street, the figure was 40%. Hull CC Final Affordable Housing Viability Report July 2011 Page 30

6.7 Generally, lower density development in the City will optimise viability for affordable housing and other Section 106 contributions. The analysis suggests (Appendix 3), that residual value is highest at lower densities that comprise family type housing. This is because the inclusion of flats and smaller units tends to weaken viability because costs are not so well covered by values as is the case with larger units; in particular detached housing. This finding is not unusual in the context of a provincial city. However, in the case of Hull, there is a particular challenge to viability in the selling prices of market units barely, if at all, covers build costs. When affordable housing is included within a scheme the viability very easily weakens. 6.8 By way of some indicative residual values, we would anticipate schemes towards the higher end of the market in Hull to achieve between 300,000 and 400,000 at around 10% to 15% affordable housing. This is an increase of some 20 to 26 fold the value of agricultural land which we believe is the appropriate Existing Use Value to consider when negotiating sites. We accept that the EUV of many sites in the City will be higher, being based on brownfield, industrial or commercial land values. 6.9 The analysis shows that residual values are very sensitive to house prices. Changes in house prices could have a significant impact on viability. This applies not only in the short term, in credit crunch conditions, but also over the long term, where historically the trend in prices has been to increase (albeit with various peaks and troughs along the way). 6.10 Additional costs associated with either a higher Code for Sustainable Homes or a higher CIL would hit the weaker sub markets. The Council will need to recognise the sensitiveness of viability across the City to additional costs from these sources. That stated, as emphasised earlier in the report, these costs should not be viewed in isolation, and modest increases in selling prices will in many cases be able to cover any such increase costs in so far as viability is concerned. 6.11 The analysis of the supply of sites across the City suggests that smaller sites do not make a significant contribution to the total supply of dwellings. Newland and Avenue and Greenwood are the only two sub markets to have any substantial proportion of supply from smaller (one to four dwellings) sites. In the case of Newland and Avenue, 21% of all supply is from sites with a capacity of one to four dwellings. For Greenwood, the commensurate figure is 9%. However, neither of these sub markets make a significant contribution to overall dwelling supply however. 6.12 The lions share of new housing development will come from larger sites. There are a number of sub markets where large sites predominate. These include, Victoria Dock, Kingswood, N and St A & Thornton Street, City Centre, Western Suburbs, North East Hull, Inner Core and Bransholme. These sub markets between them, provide a significant housing potential (from large sites). 6.13 Our analysis did not find a particular systematic viability constraint associated with small sites that would lead to a policy recommendation Hull CC Final Affordable Housing Viability Report July 2011 Page 31

exempting small sites from affordable housing contributions. Rather the evidence suggests that site size bears little or no relations with viability. 6.14 Viability is highly sensitive to the relationship between existing (or, where relevant, alternative) use value. We have looked at this issue with respect to the case studies. Affordable housing will be viable in several cases, mostly on sites in back or garden land use. However, the analysis showed that small redevelopment and conversion schemes will be significantly challenging on viability grounds. 6.15 It is important to highlight that it is not the size of the site per se that causes difficulties with viability, but the nature of the existing or alternative use. 6.16 Where a financial payment in lieu of on-site provision of affordable housing (or commuted sum) is to be sought, it should be of broadly equivalent value. This approach is, on the evidence we have considered, a reasonable one to take in policy terms. 6.17 If this equivalence principle is adopted, then the decision of the local authority to take a commuted sum will be based on the acceptability or otherwise of on-site provision as a housing and spatial planning solution, not in response to viability issues, or where a contribution should be made but where this cannot be made as a whole unit. Conclusions and policy recommendations 6.18 There is no detailed government guidance setting out how targets should be assessed, based on an assessment of viability. In coming to our conclusions, we have reviewed the residual values generated for the different sub markets in the City at the alternative levels of affordable housing tested and considered how these values compare with a number of benchmarks including existing use values. The decision as to where to set policy targets and thresholds has been taken in conjunction with the City Council. 6.19 The City s Council s current policy, set out in the Adopted Local Plan of May 2000, does not place a requirement on developers to provide affordable housing; rather it is by negotiation on appropriate sites. It thus has no target or threshold. National policy, since PPS3, requires affordable housing contributions on sites of 15 dwellings and more, or on sites of 0.5 hectare of more. 6.20 On the basis of the available evidence, which shows considerable disparity in viability levels between different areas of the City, we believe there are two key options for setting affordable housing proportions for spatial planning policy purposes: Adopt a two way split target broadly recognising the price differentials between locations. On this basis, we would suggest a 15% target be adopted for City Centre, Newland and Avenue and the Kingswood sub market area; and a 10% target elsewhere across the City. Adopt a more location specific based approach, including a three way policy position. This would, as in the above option, set a 15% target for the City Centre, Newland and Avenue and the Kingswood sub market Hull CC Final Affordable Housing Viability Report July 2011 Page 32

areas. However, there would be a further split between first, Haworth Park and Inglemire, Victoria Dock and Western Suburbs with a target set at 10%; and then a nil (0%) target elsewhere in the City. 6.21 The two way target split recognises that, in the weakest sub markets, prices will have to grow into the policy in order to make sites routinely viable. But a three way target does of course exempt several areas from the policy altogether. Given that there will be inevitably hot spots within these weaker market areas, and government policy allows local authorities to set policies ambitiously yet realistically, the case for a two way split, qualifying all areas of the District for a potential contribution, is stronger. 6.22 More sophisticated target targets would be possible. However, a degree of practicality is required when setting and delivering targets and it should be recalled that policy is somewhat informal in the area at the current time. 6.23 We do not believe that there is a case for a single target approach. Such approaches suffer from single currency approaches. They are correct in a limited number of circumstances and invariably wrong in a significantly greater number. We commend a split target approach in principle. Thresholds 6.24 There is a significant need for affordable housing in the City and it is appropriate for the Council to give consideration to a lower threshold than the indicative national minimum (15 dwellings) set out in PPS3. 6.25 Our analysis shows that the bulk of development will be delivered on larger sites. There are several sub markets where housing supply is significant and where large sites will deliver new homes. There are other sub markets where supply will come mainly from smaller sites. This analysis was shown in Chapter 4. 6.26 Whether the Council decides to adopt a lower threshold depends on a number of factors. Figure 6.1 below highlights the issues: Figure 6.1 Prices, thresholds and supply Hull CC Final Affordable Housing Viability Report July 2011 Page 33

6.27 The diagram shows price differentials, reflected in the price of a three bed terraced house. It shows also the percentage of supply by sub market from sites of under 15 dwellings. 6.28 Also significant are the figures in brackets against each sub market. This shows for example that Kingswood will supply 47% of all new dwellings (and that these will be supplied on larger sites). The diagram shows that for example Victoria Dock will supply 8% of new dwellings and these will also be on large sites. 6.29 Conversely, locations such as Newland and Avenue and Hull East will deliver housing from smaller sites. In the case of Hull East, this is more questionable in principle, since the economics of development are difficult. 6.30 However, in a location where house prices are reasonably robust, and house building is reliant on small sites, the case for a lower threshold is strengthened. 6.31 Because it has been consistently shown in all the research Three Dragons has carried out, and indeed in the case of Hull CC, that small sites are no less viable than large ones, we view the decision about thresholds to be largely a pragmatic one. 6.32 Should the Council decide to reduce threshold in a given area subject to the profile of site supply, we would back that position. By way of advice, we would normally not recommend low thresholds where dwellings will be delivered from mostly large sites. 6.33 In making its decision on thresholds, the Council will need to consider practical issues such as the need to negotiate affordable housing and other Section 106 contributions on an increased number of schemes. This assumes that the Council has now a relatively small number of schemes on which it has negotiated affordable housing. Hull CC Final Affordable Housing Viability Report July 2011 Page 34

Viability on individual sites 6.34 Our analysis has indicated that there will be site-specific circumstances where achievement of the affordable housing proportions set out above may not be possible. This should not detract from the robustness of the overall targets but the council will need to take into account specific site viability concerns when these are justified. 6.35 If there is any doubt about viability on a particular site, it will be the responsibility of the developer to make a case that applying the council s affordable housing requirement for their scheme makes the scheme not viable. Where the Council is satisfied this is the case, the council has a number of options open to it (including changing the mix of the affordable housing and supporting a bid for grant funding from the Homes and Communities Agency and/or using their own funds) before needing to consider whether a lower level of affordable housing is appropriate. In individual scheme negotiations, the council will also need to consider the balance between seeking affordable housing and its other planning obligation requirements. Commuted sums 6.36 Where commuted sums are collected a possible approach to calculating the appropriate sum sought is to base this on the equivalent amount which would be contributed by the developer/landowner were the affordable housing provided on site. This is expressed as follows: RV 100% M = Residual value with 100% market housing RV AH = Residual value with X% affordable housing (say 15%) Equivalent commuted sum = RV 100% MV minus RV AH 6.37 Where commuted sums are collected, the Council will need to have in place a strategy to ensure the money is spent effectively and in a timely manner. Hull CC Final Affordable Housing Viability Report July 2011 Page 35

7 VIABILITY THE LONGER RUN 7.1 To put the findings of the foregoing analysis into context and to consider the long term implications for the Plan period, it is helpful to look at the relationship between long and short term house price trends. 7.2 Figure 7.1 shows short term volatility in house prices against the long term straight line trend. The chart puts into context the findings of this study. It shows that 2011 is a fair point in time to consider the housing market in the light of the longer term Plan period. It shows that at the current point in time (Spring 2011), house prices are marginally below the long term trend. This means that current figures are a reasonable indicator of house prices going forward. The chart shows trends for the Yorkshire and Humberside region (Halifax House Price Index): Figure 7.1 Long and short term house price trends: Yorkshire and Humberside Source: Halifax House Price Index 7.3 Another indicator of long term viability is the relationship between house prices and build costs. This is shown in Figure 7.2. The chart shows that whilst costs have moved steadily upwards (broadly in line with inflation), prices have been more volatile. 7.4 The gap between prices and costs is land value. The chart shows that between 2003 and 2008, land values were likely to have increased significantly; with this, the potential to deliver Section 106 including affordable housing. Figure 7.2 Long term house prices and build costs Hull CC Final Affordable Housing Viability Report July 2011 Page 36

7.5 Despite short term fluctuations, the trend lines have tended to diverge with time. This means increasing land values as time has gone by. 7.6 The propensity for this relationship (between values and costs) to deliver more Section 106 has increased with time. In the case of Hull, the Council, from a policy aspect, starts from the low base; and it has been demonstrated that in a significant number of sub markets, no affordable housing is currently viable. However, the longer historic trend has proven increasing viability and for this reason, we think that the City may take a fairly robust view of delivery. Hull CC Final Affordable Housing Viability Report July 2011 Page 37

Appendix 1 HULL CC AFFORDABLE HOUSING VIABILITY STUDY WORKSHOP NOTES Introduction A workshop was held on the morning of the 5 th April 2011 at Hull City Council s offices. Representatives of the development industry, landowners were in attendance. An attendance list is given below. Name Christine Boucher Chris Wilson Andrew Williamson Carl Mitchell John England Lilian Coulsen Jim Holmes John Elliott Chris Murphy Miranda Barnes Organisation Chevin Housing Association Chevin Housing Association Riverside Riverside Strata Homes Persimmon Homes NPS NPS Beal Homes CBRE Steve?? Steph Major East Riding of Yorkshire Council Three Dragons and Hull CC would like to thank all those in attendance for their inputs to the study. At the workshop Three Dragons gave a presentation summarising the methodology and outlining the process of higher level and detailed testing which would be carried out to determine viability targets. It was agreed that the Powerpoint presentation (attached) would be made available to all Workshop participants in conjunction with these feedback notes. 2 Study overview Hull CC Final Affordable Housing Viability Report July 2011 Page 38

Three Dragons have been commissioned to carry out an Affordable Housing Viability Appraisal in accordance with the requirements of PPS3 in order to establish a robust evidence base to support emerging policy requirements as set out in the LDF. There are two parts to the commission: i) An Affordable Housing Viability Study to guide the setting of new affordable housing targets and thresholds for the Local Development Framework; ii) A Financial Appraisal Toolkit to assist negotiations on specific sites. The Affordable Housing Viability Study is to be used to justify and demonstrate the viability of the Council s new affordable housing policies. The Financial Appraisal Toolkit will be used to assess the circumstances of individual sites where viability, and therefore the ability to provide the required level of affordable housing, is in question. 3 Key issues 3.1 Basis for interpreting viability There was no objection in principle to the over-riding method for assessing viability proposed by Three Dragons. This measures viability by reference to residual scheme value less the existing or alternative use value of a site. The challenge in assessing a reasonable land owner return was recognised. It was emphasised by Three Dragons that the study will need to be robust for the Plan period. In this respect it will be important to look at the viability of sites in the current market against the context of the longer run. It was suggested by one delegate that although the longer term historical trend shows prices outpacing costs, this trend was not necessarily to be relied upon going forward. 3.2 Overall methodology Three Dragons explained that the approach to the study will be two stage with the first stage focusing on testing a notional one hectare site, assuming different development mixes and different percentages of affordable housing, with the second stage looking at a range of generic site types, ranging from large green field through to small and large brown field sites. The High Level Testing (Notional one hectare site) approach was explained by Three Dragons with no specific objections. Hull CC Final Affordable Housing Viability Report July 2011 Page 39

Data sources (e.g. HMLR for house prices and BCIS for build costs) were explained to participants. The need for best primary data sources based on a large sample was understood and agreed. 3.3 Sub markets and market values A key part of the study will involve the analysis of viability at a sub market level. Sub markets will be defined by house prices. The Powerpoint presentation shows a table draft areas and a map. Participants were invited to submit comments on the sub markets. It was explained by Three Dragons that prices were derived from three years worth of HM Land Registry data and then adjusted to today s values using all transactions of new and second hand. Delegates were invited to comment on the sub markets and prices in the Workshop. Those feeding back are reminded that the prices put forward are indicative new build prices for the various sub markets. It was generally understood that this is a challenging process where, for many locations, no new build comparable evidence exists. Consideration was given to the merits and demerits of differential affordable housing targets. The Three Dragons viability study will demonstrate the effect of different AH targets in different locations but this was ultimately a policy decision for the local authority. 3.4 Land values In the present market it is difficult to establish a realistic land value, particularly given the lack or transactions, or low levels thereof. Probably the best evidence is to be gained from development at Kingswood, where, in the current market circumstances, serviced land sells for around 600,000 per hectare; and 400,000 for unserviced land. These figures are understood to reflect nil affordable housing contribution. 3.5 Density and development mix A template of development mixes was demonstrated showing proposed mixes of house types at different densities. This is included in the Powerpoint presentation. It was suggested by Three Dragons that family type housing (density range 30 dph to 40 dph) is likely to produce the optimal opportunities for delivering affordable housing. Hull CC Final Affordable Housing Viability Report July 2011 Page 40

3.6 Thresholds and the viability of smaller sites The study looks at thresholds as well as affordable housing targets. Delegates were shown (please see also the Powerpoint) the profile of current site supply in the City across the sub markets. The data suggests a relatively low significance of small sites, suggesting the Council is not under significance pressure to go for a very low threshold in order to deliver affordable housing. Delegates were asked their views on the viability of small sites (versus larger ones). There was no consensus of view as to whether large or small sites are more (or less) viable. 3.7 Calculation of commuted sums Some delegates believe commuted sums can be a good was to deliver regeneration. Three Dragons suggest that any commuted sum should be the difference between the residual value of a scheme with 100% market housing and one with a mix of market and affordable housing. 3.8 Development costs Three Dragons presented the proposed page that will be used for the testing framework. This is included in the Powerpoint presentation. It was explained that the base build costs per square metre will be calculated from the BCIS data source. The costs have been cross checked with data from the Council s own records It was suggested that the base build costs set out in the Powerpoint are about right. Other development costs were discussed. These are set out in the Powerpoint screenshot. A discussion took place over developer return. It was explained that the testing work has been carried out using a 17.5% return rate. This relates to a return on development value, not cost, or ROCE. Three Dragons explained that the Council will not be bound by this rate of return when negotiating sites; and may under certain economic circumstances choose to adopt a higher profit margin to reflect prevailing lender policy. There were no specific comments on the other developer costs. 3.9 Affordable housing issues Hull CC Final Affordable Housing Viability Report July 2011 Page 41

It was explained that the testing analysis has been carried out assuming the affordable housing element of the scheme is split 80% Social Rent and 20% Affordable Rent. This reflects the picture of local needs and the specific challenge faced by affordable housing providers in Hull, that incomes are low. Substituting Social Rented housing with Affordable Rented housing will not make a significant difference to viability. Some Shared Ownership housing has been developed (example a scheme at Ings). A 25% share was used at this development. The study should look at the potential impact Shared Ownership might make to the viability of schemes. Delegates are requested to comment on these issues and in particular the needs for any further variations to the baseline assumptions. Some delegates expressed concern that affordable housing provision within schemes has a negative impact on the marketability of private housing within new developments. Three Dragons stated that this may be the case in some developments, but that in the absence of any systematic evidence proving the effect, this is not a factor that can be taken into account in the testing process. 4 Protocols for negotiations on Section 106 Three Dragons explained that the project will provide the local authorities with an Affordable Housing Toolkit to assist the process of negotiations on viability and Section 106 contributions. Experience has shown that this is used most effectively when this tool is also available to local developers and landowners. 5 Feedback THANK YOU AGAIN FOR ATTENDING AND WE LOOK FORWARD TO YOUR FEEDBACK Comments please to: Andrew Golland Jennifer Downs drajg@btopenworld.com Jennifer.downs@hullcc.gov.uk Hull CC Final Affordable Housing Viability Report July 2011 Page 42

Key data assumptions Hull CC Final Affordable Housing Viability Report July 2011 Page 43

Market areas and prices: Hull CC Final Affordable Housing Viability Report July 2011 Page 44

The development mixes were as follows: Affordable housing targets: 5%; 10%; 15%; 20%; 25%; 30%; 35%; Affordable housing split: 80% to 20% Social Rent to Affordable Rent Target rents Affordable Rents 1 Bed Flat 66.00 73.00 2 Bed Flat 68.00 76.00 2 Bed Terrace 71.00 79.00 3 Bed Terrace 74.00 82.00 3 Bed Semi 75.00 84.00 3 Bed Detached 78.00 87.00 Hull CC Final Affordable Housing Viability Report July 2011 Page 45

4 Bed Detached 83.00 92.00 5 Bed Detached 86.00 96.00 Typical unit sizes adopted (m 2 ): Unit sizes (sq m) Affordable Market 1 Bed Flat 46 45 2 Bed Flat 67 60 2 Bed Terrace 76 65 3 Bed Terrace 84 80 3 Bed Semi 86 90 3 Bed Detached 90 100 4 Bed Detached 100 110 5 Bed Detached 115 125 Appendix 3 Results Residual values no grant scenarios At current prices: 20 Dph 0% 5% 10% 15% 20% 25% City Centre 0.91 0.80 0.67 0.55 0.44 0.31 Newland and Avenue 0.79 0.67 0.56 0.45 0.33 0.22 Kingswood 0.55 0.45 0.35 0.25 0.15 0.04 Haworth Park & Inglemire 0.37 0.28 0.19 0.09 0.00-0.10 Victoria Dock 0.24 0.15 0.07-0.02-0.11-0.19 Western Suburbs 0.14 0.06-0.01-0.10-0.18-0.26 30 Dph 0% 5% 10% 15% 20% 25% City Centre 1.07 0.91 0.75 0.59 0.43 0.28 Newland and Avenue 0.91 0.76 0.61 0.46 0.31 0.15 Kingswood 0.58 0.44 0.31 0.17 0.04-0.09 Haworth Park & Inglemire 0.35 0.22 0.10 0.00-0.15-0.27 Victoria Dock 0.17 0.06-0.05-0.17-0.28-0.40 Western Suburbs 0.05-0.06-0.17-0.28-0.39-0.51 Hull CC Final Affordable Housing Viability Report July 2011 Page 46

40 Dph 0% 5% 10% 15% 20% 25% City Centre 1.09 0.89 0.71 0.52 0.33 0.14 Newland and Avenue 0.89 0.72 0.54 0.36 0.18 0.00 Kingswood 0.55 0.39 0.22 0.07-0.09-0.25 Haworth Park & Inglemire 0.24 0.10-0.05-0.19-0.34-0.48 Victoria Dock 0.06-0.08-0.21-0.35-0.49-0.62 Western Suburbs - 0.09-0.23-0.35-0.48-0.62-0.74 50 Dph 0% 5% 10% 15% 20% 25% City Centre 1.21 0.98 0.76 0.53 0.31 0.08 Newland and Avenue 0.98 0.77 0.56 0.34 0.13-0.09 Kingswood 0.57 0.37 0.18-0.01-0.21-0.40 Haworth Park & Inglemire 0.20 0.03-0.15-0.32-0.50-0.75 Victoria Dock - 0.02-0.19-0.35-0.52-0.68-0.84 Western Suburbs - 0.21-0.37-0.53-0.68-0.83-0.98 Prices increased by 20%: 30 Dph 0% 5% 10% 15% 20% 25% Hull North East 0.55 0.42 0.29 0.15 0.02-0.11 Inner Core 0.45 0.33 0.19 0.07-0.05-0.15 Bransholme 0.40 0.27 0.15 0.02-0.10-0.23 Hull East 0.22 0.10-0.01-0.13-0.24-0.36 Prices increased by 40%: 30 Dph 0% 5% 10% 15% 20% 25% New Cleveland 0.39 0.26 0.14 0.01-0.11-0.24 Greenwood 0.34 0.22 0.10-0.03-0.15-0.27 Na SA & Thornton St 0.12 0.01-0.11-0.21-0.32-0.43 Hull CC Final Affordable Housing Viability Report July 2011 Page 47

Illustrative scheme 30 dph Kingswood at 10% Affordable Housing Hull CC Final Affordable Housing Viability Report July 2011 Page 48