RICS draft guidance note - Assessing financial viability in planning under the National Planning Policy Framework for England, 1st edition.

RICS draft guidance note - Assessing financial viability in planning under the National Planning Policy Framework for England, 1st edition

Appendix 4: Analysing market evidence

This appendix considers the use and application of market evidence in order to inform the second component, or premium, in arriving at the BLV in accordance with paragraph 016 of the PPG.

Paragraph 016 identifies different forms of adjusted market evidence to inform the premium. These include specific references to:

  1. BLVs from other FVAs, and
  2. land transactions, but only as a cross-check to the other evidence.

Chapter 5 identifies three methods of valuation to determine the BLV. These are the primary approach, which is the EUV plus a premium, with cross-checking valuations of the BLV using, where appropriate, a policy-compliant residual land value and comparable land transactions.

Paragraph 016 states that 'Any data used should reasonably identify any adjustments necessary to reflect the cost of policy compliance (including for affordable housing), or differences in the quality of land, site scale, market performance of different building use types and reasonable expectations of local landowners'. The data should ideally conform to more general principles regarding data quality set out in Comparable evidence in property valuation, RICS guidance note.

Market evidence of premiums/BLVs in other FVAs

Paragraph 016 of the PPG identifies BLVs from other FVAs as relevant sources of information to assist in identifying the premium element in an EUV+ approach to the assessment of the BLV.

Using this approach requires identification of the differences between comparable sites and typologies and the subject site or typology, set out in PPG paragraph 016. These adjustments should be made in arriving at the BLV.

The assessor will need to have knowledge of the circumstances and factors that were considered in determining the EUV and premium uplift within each comparator. This also includes the policy considerations, particularly where comparables are from outside the local plan area. The factors underpinning the assessment of EUVs and premiums in BLVs or other FVAs should be explained. If this information is available, conclusions can be reached as to whether or not these factors are similar to the site for which the BLV is required, and adjustments made. Where assumptions have been made concerning information about the comparables, these assumptions must be clearly stated. The more assumptions that have to be made, the less weight that can be put on the evidence.

The circumstances underpinning the assessments of the EUV and premium, and which may require adjustment, could include:

  • the date of the determination of the BLV
  • landowner optionality, i.e. the range of options open to the landowner
  • state of the property, obsolescence and compliance with environmental and building regulations
  • site constraints such as ground conditions, contamination, ransom issues, planning factors, third-party rights and covenants
  • uniqueness of opportunity, such as 'one-off' site assembly
  • competition from alternative sites
  • the weighting of individual BLV/premium evidence relative to the subject property, and
  • adjustments made by the plan-maker in arriving at an adopted premium, if any.

Information on BLVs and premiums in other FVAs can be requested but, if it cannot be provided, the practitioner will need to make assumptions and this will have an impact on the quality of that evidence. It is up to the decision-maker how much weight to accord to that evidence.

Where the EUV part of the benchmark is a substantial element of the overall assessed value, the premium is usually stated as a percentage increase of the EUV. This is typical in urban and brownfield sites.

In the case of greenfield, cleared brownfield or some sui generis (unique) sites outside of the normal planning use classes where the EUV is a small proportion of the BLV, the premium is more typically stated as an actual amount.

Where the BLV has been determined directly from evidence of BLVs in other FVAs, the EUV must also be calculated and reported, even if it is zero or trivial (see the mandatory reporting and process requirements in Financial viability in planning: conduct and reporting, RICS professional statement), and the premium reported as the difference between the EUV and BLV in either percentage or absolute terms.

Market evidence of land transactions

PPG paragraph 016 states that evidence of land transactions can be used, but only as a cross-check to other evidence. The BLV comprises two components, the EUV and a premium; it is therefore important to state whether the comparable land transaction evidence is cross-checking the EUV component, the premium component or the BLV as a whole.

Many of the same adjustments necessary for all types of market evidence, including the circumstances and factors listed in this section, apply equally to land transactions.

Land transactions should be adjusted to ensure that they are compliant with up-to-date planning policy, including affordable housing requirements, in order to circumnavigate the potential circularity issues identified in chapter 5.

Where transacted sites have planning permission, analysis of the land price will be undertaken assuming that permission. Where that permission is not compliant with up-to-date planning policy (or emerging planning policy), it will be necessary to adjust the price to that which would have been paid, assuming full policy compliance with the up-to-date policy.

In addition, the planning permission may not be optimal for the site. Where that is the case, the land price may reflect optimal rather than sub-optimal permissions. There is a danger here that an optimal land price may be used to evidence a higher BLV within a residual calculation that assumes the sub-optimal permission, reducing developer contributions while protecting developer return. Analysis of transaction evidence should be undertaken by reference to the optimal scheme, where it is obvious that the actual scheme is significantly less than the optimal scheme on which the price should have been based. Knowledge is required about as many of the relevant factors in land sales as reasonably obtainable, including the sale terms, planning status, date(s) of payment, third-party arrangements and any option agreements. Land transaction information is partly in the public domain (Land Registry and other sources), but rarely is all relevant information available. The same standards of data quality apply to land transactions as to other market evidence. Where some element is not known, assumptions can be made but this will have an impact on the quality of that evidence. The amount of weight given to land transaction evidence will be reduced where the assessment is based on an optimal permission, or any other circumstances where the terms of the planning consent and any other facts are not known.

The analysis of transactions should clearly demonstrate how any adjustment for abnormal site costs was undertaken, and how any additional and unusual costs were treated. This includes contamination remediation works and any related land remediation relief available in the market to prospective purchasers.

The analysis of land transactions is normally undertaken by reference to unit of comparisons. In the case of development land, these units of comparison can be based upon a number of outcomes such as price per developable hectare/acre, price per habitable room, price per unit, price per bedroom, etc. or related to the GDV of the actual, proposed or optimum scheme. Units of comparison can be very misleading where the comparable transactions differ from each other to any great extent by location, property type or tenure. Where the comparable site includes commercial space, consideration should be given to how this element is accounted for in the analysis.

In large-scale greenfield development, a scheme may be required to provide land to facilitate the delivery of public facilities such as schools, open spaces, etc. This may be provided at nil value (being essential in planning terms in order to allow the scheme to proceed). This reduces the residential net developable area of the scheme, which needs to be reflected when determining units of comparison and the BLV. This situation can occur outside of greenfield sites and the approach does not change.

In addition, land transactions should be assessed in relation to viability by adopting a policy-compliant residual approach. The residual element will test the level of developer return in land transactions assuming policy-compliant prices.