Development Viability and Threshold Land Values

1. Development Viability and Threshold Land Values 1 2 / 2 / 2 0 1 4

This paper seeks to address the content of the Core Strategy Community Infrastructure Levy Draft Viability Assessment, dated Oct 2015. That paper seeks to establish threshold land values (TLV) at which level a development may be viable. Whilst the document sets out to establish TLV for the purposes of establishing a CIL level and/or the ability of a site to set affordable housing contribution levels, it is also being used to establish the deliverability of sites in the SHLAA and their ability to contribute to overall supply in the respective delivery areas. This documents seeks to address the content of that document as a whole. In summary we believe the Councils assertion with respect to TLV s is incorrect and as such is leading to a false conclusion with respect to their 5 year housing land supply and importantly the delivery of their strategy as set in the draft Core Strategy. As such we assert the draft Core Strategy is unsound for the reasons included herein and that set out in accompanying reports. This report should also be read in conjunction with the letter prepared by George F White Chartered Surveyors who are at the forefront of land transactions in Northumberland. They have detailed their experience of issues arising from the sale of land and how such impacts on the TLV. The report format seeks to establish the parameters of how to establish a TLV and to then respond to the conclusions of the Council on the same. What is a competitive return to a land owner? NPPG States: Paragraph: 024 Reference ID: 10-024-20140306 Competitive return to developers and land owners The National Planning Policy Framework states that viability should consider competitive returns to a willing landowner and willing developer to enable the development to be deliverable. This return will vary significantly between projects to reflect the size and risk profile of the development and the risks to the project. A rigid approach to assumed profit levels should be avoided and comparable schemes or data sources reflected wherever possible. A competitive return for the land owner is the price at which a reasonable land owner would be willing to sell their land for the development. The price will need to provide an incentive for the land owner to sell in comparison with the other options available. Those options may include the current use value of the land or its value for a realistic alternative use that complies with planning NHBC - Viability Testing Local Plans, June 2012, states: Land values In order to determine an appropriate current use value, planning authorities should take up-to-date advice from local agents and valuers. This is likely to give a more locally accurate picture than relying on nationally available datasets. The land price data published by the Valuation Office Agency (VOA) should be treated with 1

considerable caution given that it may refer to transactions for fully serviced land before taking account of local policy costs. In using data on housing land values, it is important to distinguish between headline values associated with fully serviced sites, as opposed to those net values which take account of infrastructure costs, Section 106 and CIL costs, and the costs of complying with existing policy requirements including the provision of affordable housing. What ultimately matters for housing delivery is whether the value received by the land owner is sufficient to persuade him or her to sell their land for development. This can be very different to the headline value one developer might pay another developer for a fully serviced, permissioned parcel of land on a large strategic site. Homes and Communities Agency - Investment and Planning Obligations: Responding to the Downturn, States: a viable development will support a residual land value at a level sufficiently above the site s existing use value (EUV) or alternative use value (AUV) to support a land acquisition price acceptable to the landowner. The District Councils Network and County Councils Network Community Infrastructure Levy Advice Note of January 2012 states: 2.8 The starting point in many appraisals is a low value existing use with an assumption that landowners will release land based on a modest 10-20% uplift. This approach is more justifiable in Affordable Housing Studies as they generally set policy targets which are subject to further viability assessment at planning application stage. It is therefore understandable that these appraisals attempt to maximise affordable housing provision by minimising base land values. 2.9 This approach may be less robust with CIL. Once adopted, CIL is a fixed levy which will not be subject to further viability assessment. It may therefore be unrealistic to take a lowest common denominator approach to land value as it will simply not reflect the majority of market circumstances that are likely to guide landowners decisions. 2.10 The alternative approach is to consider the value of land with planning permission for the chargeable category under consideration. This is a much more realistic approach to real world circumstances. It will rely on assessment of value from comparable evidence and will therefore be consistent with property sales value evidence which will almost certainly be based on comparable evidence. Landowners will always have an aspirational value based on the planning permission that might be achieved. Any assessment should however temper landowner aspiration with acknowledgement of the contributions that may reasonably be expected by the Local Authority as discussed above. It should represent the minimum value at which land is likely to come forward and will generally rely on a professional Surveyors assessment Commenting on the above we would conclude that a land owner will want more for land for development than it is worth in its current use... The starting point here is what land is worth in its current use. The value of agricultural land has tripled over the last decade but still rarely exceeds 25,000 per hectare, a sum that is not really significant 2

when compared to the value generated by development in places where developers are active. In contrast land that is in use usually has significant value. For instance, an old but occupied industrial estate might be worth over 3m per ha in economically successful areas of the UK and over 1m ha nearly everywhere. Even open hard-standing, when there is some demand for it, will command a much higher price than agricultural land....usually quite a bit more! The size of the incentive that a landowner will need over and above the current use value of the land before he/she will release it varies. As far as agricultural land is concerned, this is sometimes sold with a house, outbuildings and other facilities that have some current value. At a personal level, some farmers have an attachment to their land and others will be heavily taxed on the proceeds of any sale. In some places there is good reason to suppose that the planning authority will be keen to see the land developed so the landowner will not want to sell until he or she believes that the price offered is unlikely to be bettered in the foreseeable future. Major landowners such as the Church Commissioners are often prepared to be very patient in this respect especially when the land concerned already provides some income. In contrast many industrial landowners do not want to retain land or property that is no longer needed for their business and will simply aim to dispose of it on the best basis they can. The trick here is to know who your key landowners are and to try and understand their motivation and constraints. Then you can tailor your analysis to local realities. This assessment is lacking in Northumberland s draft Viability Assessment which tends to be based on superfluous number crunching rather than the collection of real local market intelligence. The dynamism of the market and the expectations of land owners need to be included as a factor in determining the level at which a reasonable land owner will sell their land. As an example, a typical small infill site of 0.5 acres suitable for about 8 dwellings, currently comprising of unused incidental open space, with a nominal open market value (OMV) of 10,000 without planning permission, might be worth say 250,000 with a residential consent, having allowed for all development costs and contributions. The significant increase in value of 240,000 represents an uplift factor of 24, and would plainly demonstrate viability. The excess will vary in different circumstances, reflecting current use and taxation levels. At the other end of the scale, the owner of a brownfield site, with an existing use value of 400,000 that could be worth 440,000 with a residential permission, would consider that the increase of 40,000 (or uplift factor of 1.1), insufficient to persuade the owner to sell, particularly given taxation on capital gains, in addition to sale and possible relocation costs. This will certainly be true of most Brownfield sites in Northumberland. An uplift of 10% over and above the EUV (existing use value), will be unlikely to persuade an owner to sell. In addition to achieving an acceptable uplift factor taking account of the existing use value, all sites must exceed the opportunity cost of income that could be generated by an alternative use. Some examples are presented below in relation to renewable energy development and how such enhances the value of land currently in agricultural use. A further example is a 2 acre brownfield site in an appropriate location (e.g. close to a town centre) could theoretically accommodate about 100 cars for parking at 5 per day for say 40 weeks, or 200 days, which would generate an 3

annual income of 100k. At 50% capacity, taking account of overall and fluctuating demand, as well as voids, 50 cars would generate 50k per year. The uplift value should take account of potential for such income, and the potential annual interest and/or rate of return that would be generated by the sale which would be forgone if the site remains a car park. The uplift should significantly exceed the potential income of the alternative use over a number of years, otherwise the landowner will not be interested in selling. The Wokingham Appeal Decision (APP/X0360/A/12/2179141) in January 2013 provided clear support for an approach to establishing a reasonable return the landowner under the requirements of the NPPF. The case revolved around the level of affordable housing and developer contributions that could be reasonably required and in turn the decision hinged on the land value allowed to the applicant as a reasonable return to incentivise release of the site. The Inspector held that the appropriate approach to establishing the benchmark or threshold land value would be to split the uplift in value resulting from planning permission for the Alternative Use - 50:50 between landowner and the community What is the Existing (EUV) or Alternative Use Value (AUV) of the Land? Northumberland Affordable Housing Viability Study (Tribal) 2010, States: Existing and Alternative Use Values Business/ industry land values Some sites will have an alternative use for business or for industry. Industrial and business land values in Northumberland appear to be relatively low. Cramlington is the location for which the VOA tracks values, and the range of values in January 2010 was stated to be from 80k- 165k per ha, with a typical value for industrial/ warehouse land of 122k per ha. This was slightly lower than the North East average for industrial/ warehouse land of 161k per ha. Even for the B1 class, which includes office use, the North East values are the lowest in the country, with land values ranging from 80k per ha to 285k per ha, and a typical value of 225 per ha. The Property Market Report suggests that the typical value of land for industrial development in the North East is amongst the lowest in UK - Durham, Sunderland and Newcastle make up three of the lowest four value areas in the UK, together with Dundee. Agriculture For other sites, the existing use and the most relevant alternative use will be agriculture. Current values for agricultural land in Northumberland are 11.1 k for arable farms, 7.4 k p/h for mixed and dairy 1 farms and less than 1k per ha for hill land. 4

It is reasonable to assume that if a land owner is considering a sale of land he will examine the options available to him to maximise that development value based upon planning policy restrictions, and demand for alternative development forms. Three alternative value scenarios arise: Values for alternative development on the edges of settlements with no general policy restrictions; Values for alternative development within settlements with no general policy restrictions; Values for alternative development within settlements where general policy restrictions exist. Establishing an alternative development/use value or AUV will assist in understanding what would be a competitive return to a reasonable land owner. Many appeal cases advise that a 10 20% above Existing Use Values (EUV) or AUV is appropriate. Values for edge of Settlements based upon planning policy with no major restrictions Utilising the data from the Northumberland Affordable Housing Viability Study, compound RPI has been calculated to establish the values at 2015 prices. RPI was running at the following since 2010: 2010 4.6% 2011 5.2% 2012 3.2% 2013 3% 2014 2.4% The average RPI was thus 3.7% Reflecting the data Industrial values would increase between 2010 and 2015 as follows: 2010 2015 Cramlington Low 80k 95.9k Cramlington High 165k 197.8K Cramlington Typical 122k 146.3k Region Average 161k 193.1k Reflecting the data B1/Office values would increase between 2010 and 2015 as follows: Low 80k 95.9k High 285k 341.7k Typical 225k 269.8k 5

It can thus be assumed using the above that in an edge of town location, where no restrictive planning policy exists that land values (not calculated at the margins of viability) can typically and realistically be assumed to be 270/ha. In addition the values derived from the above that detailed in relation to a Solar Farm investment under the heading Values of green field land with planning restrictions: Alternatives land uses is applicable to this location also. Values for such are 453.6k/ha Value of Land within Settlements with no general policy restrictions Within a town or urban location Alternative Uses may also include social, welfare, health, retail etc. Thus land values within a town or village can be expected to be considerably in excess of 500k per ha. Values of green field land with planning restrictions: Alternatives land uses In other locations, i.e. edges of settlements, where restrictions may apply, all or some of the following may be applicable: Amenity land; Sports and Leisure opportunities; Renewable energy development; Mining and Minerals The following is based upon an assessment for the installation of either a wind turbine or a solar farm for development of 1 acre of land: Source: http://www.cornwall.gov.uk/media/3625763/d1-2-1050-technological-developments-and-innovative- Solutions-Gage-Williams-West-Country-Renewables.pdf Incomes: Turbine = 50k per annum per acre; Solar = 40k per annum per acre 1. Value per acre based upon lease to company: Based upon a lease: Rental income for solar farm ranges from 750-1500/acre Rental income for a turbine ranges from 2000/acre to 3400/acre Yields are approx. 6% Values thus in the region of 25k/acre (or 61.8k/ha) for a solar farm or 56k/acre (or 138.6k/ha) for a wind turbine Using Northumberland and Durham Methodology land would thus be valued 6

Solar = EUV + 20% + 250,000 premium uplift = 324k/ha Turbine = EUV + 20% + 250,000 premium uplift = 416k/ha 2. Value per acre based upon solar PV installation (given fact that turbine likely to cause some nuisance in close proximity to settlement): Cost of Solar Installation on 1 acre = 300k; Return 40k per annum for 20 years. Yields slightly higher given risk associated maintenance, and degradation and lack of certainty of sale of power likely in the region of 7.5%. Value is thus 533.3k/acre Deduction of costs for installation = 300k Residual values of land with an installation = 233.6k per acre. To obtain VP = deduction for removal, remediation, diminution of loss of income = 50k approx Residual Value per acre = 183.3k/acre or 453.6k/ha. Using Northumberland and Durham Methodology land would thus be valued EUV + 20% (no uplift premium as land already in active commercial use) = 544.4k/ha Some Comparables: In order to understand what a reasonable landowner would expect in return for his land, clearly account needs to be taken of the above factors, but also a reasonable landowner will require that the Local Authority also exercise reasonableness and reflect the value of his land by reference to comparables. It would be unreasonable to expect one land owner to accept Industrial Land Value or Agricultural land value plus a small premium, particularly noting the tax implications, when another land owner is clearly attaining a higher value for his land noting the recorded sale price of such land. Such appears to be the principle of test in the Wokingham Appeal Decision (APP/X0360/A/12/2179141) in January 2013, where the uplift was shared 50/50 and the uplift being deemed to be the threshold value for assessing viability in relation to affordable housing contributions. As such we need to have reference to comparables. The Land value estimates for policy appraisal document published by DCLG in February 2015 provides some reference to comparable land values. It can be found here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/407155/february_2015_land_val ue_publication_final.pdf 7

That publication identifies that residential land with nil contribution to affordable, in Northumberland, housing would typically sell for 1,725,000/ha or 697,054/acre. Interestingly the document has this to say when discussing assumptions to arrive at the hypothetical or typical land values for each location, at its Annex A: In a number of cases schemes that do not produce a positive land value in the model. A reserve value ( 2,470,000 for London and 370,000 elsewhere) has been adopted to represent a figure at less than which it is unlikely (although possible in some cases) that one hectare of land would be released for residential development. This has been taken on a national basis and clearly there will be instances where the figure in a particular locality will differ based on supply and demand, values in the area, potential alternative uses etc. and other factors in that area. Applying the Wokingham Appeal decision calculation to a greenfield site in Northumberland a reasonable landowner would expect to receive (or how the Threshold Value would be calculated): Northumberland Threshold Value = Typical Land value x 50% + Agricultural Value Or 1,725,000 x 50% + 25000 = 887,500/ha or 358,629/ acre The same document also provides some guidance on Estimating land value uplift associated with land use change. Guidance on the methodology for valuing land use change in the context of residential development is provided within the Transport Appraisal Guidance unit A2-3 (transport appraisal in the context of dependent development); available at the following link: https://www.gov.uk/government/publications/webtag-tag-unit-a2-3-transport-appraisal-inthe-context-ofdependent-development The referenced publication provides advice on valuing land associated with transport schemes. It makes reference as to how to calculate the EUV at Appendix A, para A.7: A.7 Existing land use value [2] Existing land use value = {hectarage of dependent housing (per hectare) value of land in industrial use} + {hectarage of dependent housing (per hectare) value of land in agricultural use} Applying the above to Northumberland the EUV would be: 1. Industrial EUV = 197,800 (Ind LV in Cramlington/Mid market Area) + 25,000 (Agr LV) = 222,800/ha 8

2. B1/Office EUV = 341,700 (B1/Office LV in Cramlington) + 25,000 (Agr LV) = 366,700 3. Renewables EUV = 453,600 (LV with Solar) + 25,000 (Agr LV) = 478,600/ha Given most land owners would seek the highest return for their land to compare this with an offer of purchase for residential purposes it would be appropriate to set the minimum return to the land owner or the Threshold Value at between values for development as show in 2 and 3 above. Some comparables are below: Dissington Estate: An examination of the estate file by G F white showed that Dissington Estate have rejected offers of 180k and 300k per acre respectively on offers for two small portions of land. A portion of land was sold to the owners of a property on Runnymede Road for 15,000, which amounted to 500 sq metres (equivalent 121k/acre). Amenity Land Comparable Kincraig, Alnwick sold by GF Whites in 2011 at 65000 for 0.2acre site ( 330k per acre). Land was purchased as amenity land with no development value given its land locked position adjacent to purchasers property. Lugano Group Ltd sold three properties on the Coast at Whitley Bay for 1.9m to North Tyneside Council. The sites were all in a degraded use only capable of redevelopment. The site areas in total were in the region of 0.8 acres. The residual value was this in the region of 2.3m per acre. Lugano Group Ltd purchased land in Darras Hall equating to approx. 4 acres with no planning value (restrictive planning policy existed) at 1.1m, or 275k/acre. LuganoGroup Ltd have an option on a greenfield site in Northumberland on the edge of a settlement. The site has a gross area of 3.2 acres, net likely 2.8 acres. The Agreement includes a clause with a minimum gross greenfield value to the owner at 1m or 312,500/acre. The development is contrary to local policy but is likely compliant with the NPPF. An Option Agreement for land at Morpeth has recently been completed by an external party. The Option Agreement is for 475,000. Although the site is in excess of 2 acres, development of the land is restricted due to access arrangements to 6No. dwellings. In this instance the land take is the equivalent of 0.75acres, 9

providing an equivalent land value of 633,000/acre. The development is contrary to local policy but is likely compliant with the NPPF. A recent deal has been completed at Newminster Abbey House for the purchase of the house and land at 1.2m. The House has an equivalent value of 800,000. The Land is valued at 400,000, and is approximately 1 acre in area. The development is contrary to local policy. Matters for Consideration The sale of Land I subject to taxation. Capital Gains and Inheritance tax issues can give rise to a tax bill of 28 52%. Please refer to the George F Whie letter for further comment on this matter. If a land owner receives 280k per ha, or 113k per acre, potential return to the land owner is only 54k after tax. If the land owner knows that with PP or a value measured against the development plan means that the land is worth 450k + acre then what incentive is there for him to sell with a return of only 54k? Translating the above into land values for each type of location B1/Office development on the Edge of Settlement Renewable Energy development on the Edge of Settlement Within Settlement (Green Field or Brown Field) Edge of Settlement Green Field (Planning Restrictions) EUV/HA (Agriculture) Min AUV/HA Enhancement (for Agricultural Land Only) Premium (+20%) Competitive Return Value (CRV)/HA 25000 270,000-54,000 324,000 25000 453,600-90,720 544,320-500,000-100,000 600,000 25000 453,600-90,720 544,320 10

Utilising the above the minimum value for land in Northumberland would be in the region of 325-600k per hectare. Testing this against comparables shows that land for various planning compliant purposes is exchanging hands with minimum returns to the land owners at 300-600k per acre, or 742-1.5m per hectare. It would be suggested that the typical threshold value against which to test viability should be: Low Value Areas - 400k per hectare Mid Value Area - 550k per hectare Higher Value Areas - 650k per hectare Highest Value Areas - 750k per hectare 11