The Strange Rise of Viability Appraisals in the Planning System

Centre for Real Estate & Planning Research at Henley Business School

By Professor Pat McAllister

The research covered in this article will be discussed in more detail at a new RREF Research Forum that will be launching in May this year. To register your interest, please email events@rref.reading.ac.uk.

In England, for over three decades planning obligations have been the main way which local communities have been able to benefit from some of the uplift in land values 'released' by planning permission. Since around 2005, there has been an incremental but major shift in how policy regarding planning obligations has been made and how planning obligations are negotiated for individual development projects. This has involved financial viability becoming a central consideration in planning policy making and development management. In essence, ostensibly to ensure that development is deliverable, a viability test involves a quantitative calculation of whether policies regarding planning obligations compromise a "competitive" financial return to the land owner and the developer.

In a period of high levels of policy change in the English planning system, this shift towards viability appraisal has been a fundamental adjustment to the planning regime. In policy making, the main application of financial viability modelling has been in the formation of local planning policy regarding planning obligations (mainly requirements for affordable housing provision and contributions to education, health, infrastructure and other community facilities). Following the introduction of the Community Infrastructure Levy in 2012, local planning authorities were also required to apply financial viability tests to assess whether it would compromise deliverability. For specific development schemes, viability calculations have been at the nexus of community opposition to proposed major regeneration projects.

The focus of this research paper has been largely on the process of viability testing and on evaluating whether viability calculations are fit for purpose. In practice, the purpose of the policy of applying viability calculations was not made explicit. Its applications imply that the purpose was to provide a rational basis for testing whether planning policies, including policies on planning obligations, can be "delivered" by market participants. In the development management context, as a neutral tool, viability calculations are essentially being used to calculate the capacity for planning gain from a proposed project.

A key problem is that the calculations are prone to substantial intrinsic uncertainty in a large number of the appraisal model inputs. Whilst calculations provide an impression of scientific precision, this is often largely spurious. The key inputs into development viability appraisals are replete with uncertainty. The result is a large degree of uncertainty in the viability appraisal outputs and, therefore, any estimation of the scope for planning obligations. Specific policy requirements for planning obligations that are based on the outputs of development appraisal models are then, to some (also uncertain) extent, capricious. This is unavoidable and it may be a cost that is outweighed by the potential benefits of viability calculations. However, this unavoidable appraisal model input uncertainty produces a contest over the viability calculations and, in turn, facilitates opportunistic behaviour by developers and land owners.

Although it's an evolving topic with new guidance and precedents regularly emerging, a key issue in the use of viability applications has been poor governance and competing guidance. Given the clear incentives for developers and land owners to bias viability calculations, the economic dependence of many viability consultants on developers and land owners, the lack of transparency, contested or ambiguous guidance and the opportunities created by input uncertainty for bias, it should not be surprising that land owners and developers tend to be able to demonstrate that they are unable to comply with policies on planning obligations. In London, this has been occurring in a city with some of the highest land values in the world. Of course, weaknesses in guidance and governance can be addressed - if there is a political will.

Given the broader political and planning policy context in which viability calculations have become so prevalent, it would be a, in Forester's phrase, a "rationalist's fantasy" to ignore the power strategies and micro-politics involved in viability calculations Even if there is the political will to 'standardise' the process of viability calculations, of course procedural guidance can be shaped to favour different interests. Networks of government ministers, civil servants, policy advisors, political parties, lobbying groups, corporations, professional bodies, think-tanks, activists etc. constitute the policy venues or deliberative arenas which, even to insiders, are often only partially visible and who have been trying to shape how viability calculations are produced. Developers and land owners have been better resourced than local authorities and, debatably, have had a more sympathetic hearing from a Government that has been eager to stimulate the private housing market. Arguably, the unresolved equivocality surrounding the concept of Threshold Land Value provides a striking illustration of ambiguity that has been constructive from the perspective of land owners and developers and destructive from the perspective of the wider community.

For further information email rep@henley.reading.ac.uk or contact 0118 378 8175.

The research covered in this article will be discussed in more detail at a new RREF Research Forum that will be launching in May this year. To register your interest, please email events@rref.reading.ac.uk.

 

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