Valuation of land for Affordable Housing Charles Solomon

Valuation of land for Affordable Housing Charles Solomon MRICS

Housekeeping

Course Times 9. 30 - Start 11. 00 - Break 12. 30 - Lunch Break 15. 00 - Break 17. 00 - Close

INTRODUCTIONS • • Charles Solomon – who am I and why am I here? You – who are you and why are you here?

Agenda • When does affordable housing get developed? • Affordable housing types for new developments • Methodology for developing development land • Factors affecting development land values – including GDV, costs, finance, etc. • Reporting

Exercise 1: How is affordable housing provided? 5 minutes: Affordable housing is delivered in a number of different ways. Identify as many as you can.

What is affordable housing? Definition provided in England: NPPF: Affordable housing: • • • Social rented, affordable rented and intermediate housing, provided to eligible households whose needs are not met by the market. Eligibility is determined with regard to local incomes and local house prices. include provisions to remain at an affordable price for future eligible households or for the subsidy to be recycled for alternative affordable housing provision Removed from previous (PPS 3) definition: • • Meets the needs of eligible households including availability at a low cost. Enough for them to afford.

TENURE TYPES- SOCIAL RENTED Indexed based from January 1999. The basis of valuation adopted is EUV as set out in the RICS Valuation Standards at UKPS 1. 3 Aim to reach Target rent by 2012. Guidance- www. tenantservicesauthority. org.

SOCIAL RENT- GROSS TO NET RENT Net passing rent is calculated by deducting the following costs from the gross rent receivable by the registered provider: • management costs; • repairs & maintenance costs; • allowance for voids & bad debts; • annual sinking fund (including allowance for major repairs); and • unrecoverable service charge.

TARGET RENT DATA EXTRACT 2009

TENURE TYPES- AFFORDABLE RENT: New tenure introduced in 2010 Minimum term 2 years Up to 80% of market rent- but exceptions Annual increase RPI + 0. 5%, but re-assessed at end of tenancy term Issues: Local Housing Allowance (LHA) cap Weak/ fragile market

AFFORDABLE RENT- ASSESSMENT OF RENT • a) b) c) Assessment by LA and RPs as to what level of rent is affordable: Research property prices, rent levels & LHA Analyse current and future benefits allowance Produce affordability assessments based on household income • Typically, “affordable” rent is defined as a rent that does not exceed 1/3 of gross household income. • Recommended AR example (LBTH):

TENURE TYPES- INTERMEDIATE NEW BUILD HOMEBUY Part purchase, part rented Rent element typically averages 2. 75% of retained equity. Staircasing

NEW BUILD HOMEBUY- AFFORDABILITY

PLANNING INFLUENCES IN ENGLAND WALES • • • S 106 Agreements Area Action Plans Viability

VALUATION METHODOLOGY VIP 12 - Valuation of Development Land • Comparable Land Values • Residual Appraisal Valuation of Land for Affordable Housing Financial Viability in Planning • Assessment of viability

MARKET VALUE OF LAND- VIABILITY FVIP (Draft) definition of site value is assessing viability: “Site Value should equate to the Market Value subject to the following assumption: that the value has regard to development plan policies and all other material planning considerations and disregards that which is contrary to the development plan. ”

GROSS DEVELOPMENT VALUE • • Rent receipts Capital receipts Re-cycling from right to buy transactions Internal or cross subsidy Usually calculated by discounted cash flow (DCF) approach- This estimates the present worth of a property assuming projected future net income and re-sale value. Calculated using software such as Pamwin, but also purpose designed toolkits such as Three Dragons, HCA DAT, or bespoke models.

Income Method Advantages • It focuses directly on the value of the property to the individual concerned. • Very detailed and derive specific conclusions (Compare to general approach practised in the Comparable Sales Method. ) Disadvantages • More complex and less intuitive than the Comparable Sales Method. This is one of the reasons why it is often overlooked. • Ignores the actual market prices for property. • Highly sensitive to the assumptions made.

EXTERNAL SUBSIDY- GRANT FUNDING • • 2011 -15 Affordable Homes Programme (Now limited grant remaining) 2008 -11 NAHP Issues: Use of public land S 106 Cross subsidy HCA Design & Quality Standards Assessment toolkit

EXERCISE 2: ASSESSMENT OF INTERNAL SUBSIDY Look at the exercise notes. This exercise goes through an analysis of a real case to establish the level of internal subsidy. Analyse the data. Assess values being offered on a £/m 2 basis. What are your conclusions? (20 minutes)

ESTABLISHING DEVELOPMENT COSTS • • BCIS Net Sales v Gross Area Externals Code for sustainable homes Inflation Contingency Other costs – contamination, off-site works, capital contributions

EXERCISE 3: ESTIMATING BUILD COSTS Look at the exercise notes. This exercise goes through the estimation of build costs, looking at base build costs, allowance for Code for Sustainable Homes and externals. Assess: • GIA of the block of flats. • GIA of the terraced housing. • Base build costs. • Costs to Cf. SH level 4. • External costs. • Total build costs. • What is this as a £/m 2 for the GIA of the individual units?

CIL & S 106 - NPPF CIL is not charged on Affordable Housing units. It is charged on other qualifying development, based on the net increase in new development. Levy rates vary. S 106 is defined in NPPF as: (i) necessary to make the development acceptable in planning terms; (ii) directly related to the development; and (iii) fairly and reasonably related in scale and kind to the development.

EXERCISE 3 - S 106 REVIEW What costs in this s 106 tariff would you recommend should be questioned? Which of these costs would now be covered by CIL?

ON COSTS / PROFESSIONAL FEES • • How much Specialist professional fees

FINANCE • • • Current cost of borrowing Favourable rates Strength of covenant to borrow

TAX • • • SDLT VAT Golden brick

RECEIPTS / PAYMENTS • • • Timing Cashflow Sensitivity

DEVELOPER’S PROFIT • • • Private housebuilder position Market trends Registered provider position

EXCEPTION SITES NPPF s 54: “In rural areas, . . . through rural exception sites. . . consider whether allowing some market housing would facilitate the provision of significant additional affordable housing to meet local needs. ” Factors: • HCA grant normally available. • Developer- Assume RP cross subsidising? May need to allow for market developer with profit requirements. • Benchmark/ Land value- What is a “competitive return”?

COMMUTED SUM • NPPF S 50 allows a “. . . contribution of broadly equivalent value can be robustly justified (for example to improve or make more effective use of the existing housing stock). ”

APPRAISAL TOOLKITS • • • HCA DAT- Example for review Three Dragons Argus, Pro. Val etc

REPORTING THE VALUE VS 6. 1 • the basis of valuation must be clearly stated. Where a basis other than Market Value is adopted this must be fully explained. • all the assumptions made must be stated and, where appropriate, comment made on the effect of those assumptions where they are material. • and the statement requiring comment on the valuation approach is particularly important in these valuations. Provide a copy of the appraisal and sensitivity analysis? Negative value reported Consider higher value alternative uses Range of values?

NEW DELIVERY METHODS • • Are there any? Impact?

SUMMARY • • • Considered the background Looked at the role of planning and particularly S 106 agreements Gone through the methodology with reference to VIP 12 and Guidance note: Valuation of land for affordable housing Considered the reporting structure Concluded with a look forwards to potential changes