Affordable Housing Viability Assessment


Affordable Housing Viability Assessment

Affordable Housing and Viability Assessment in the Planning Process

Affordable housing is a crucial aspect of creating sustainable and inclusive communities. As well as national and local policies supporting this, research carried out by The Joseph Rowntree Foundation and the Collaborative Centre for Housing Evidence (CaCHE) shows time and again affordable housing is a critical need in our communities. To ensure a fair distribution of housing options, planning authorities often require developers to include affordable housing units in their projects or contribute financially to off-site affordable housing provision. In some cases, developers may need a type of Viability Assessment to justify reduced affordable housing obligations through an Affordable Housing Viability Assessment (AHVA). In this blog post, we’ll explore the importance of engaging independent professionals in conducting AHVAs and how their expertise contributes to a more accurate and objective assessment.

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What is an Affordable Housing Viability Assessment?

A Closer Look at AHVAs and Their Purpose

Affordable Housing Viability Assessments play a vital role in the planning process by evaluating the financial feasibility of proposed developments while considering affordable housing requirements. These assessments inform planning decisions and negotiations between developers and local authorities.

The Components of a Comprehensive Affordable Housing Viability Assessment

An AHVA should include the following elements:

  • Compliance with National Planning Policy Guidance (NPPG) and Royal Institution of Chartered Surveyors (RICS) guidance
  • Transparent assumptions and robust market evidence
  • Calculations of Benchmark Land Value, Gross Development Value, development costs including contingency, reasonable profit margin;  and abnormal costs
  • Sensitivity analysis
  • Robust justification for any argument for reduced affordable housing provision or commuted sum payments

When do you need an Affordable Housing Viability Assessment?

‘Provision of affordable housing should not be sought for residential developments that are not major developments (10 or more dwellings for residential schemes), other than in designated rural areas (where policies may set out a lower threshold of 5 units or fewer). Paragraph 63 of the National Planning Policy Framework (NPPF)

There are, however, exceptions with a number of councils, particularly in London or other large Towns and Cities adopting a much lower threshold. Checking with a Planning specialist to see if an affordable housing contribution is required from your development. Normally, do this as part of your due diligence and valuation before purchasing a site.

If a developer’s contribution towards affordable housing prevents them from making a reasonable profit, then the development becomes unviable. Consequently,  the developer must conduct an assessment to determine the amount of affordable housing that the development can provide, if any. This assessment is called an Affordable Housing Viability Assessment. Even if affordable housing is provided as a commuted sum through a legal agreement, and local policies calculate provision based on a percentage of Gross Development Value (GDV), an Affordable Housing Statement may still be necessary to determine and agree on the expected GDV.

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The Value of Engaging Independent Experts

Independent professionals, such as chartered surveyors and chartered planning consultants, bring several benefits to the AHVA process. The key benefits of using independent professionals include:

  • Objectivity and impartiality: Independent professionals have no vested interests in development projects, ensuring unbiased assessments based on the best available evidence. Consequently, this objectivity helps maintain the integrity of the planning process and builds trust between stakeholders.
  • Expertise and experience: Independent professionals possess the necessary skills, knowledge, and experience to conduct comprehensive and accurate AHVAs.  Their familiarity with NPPGRICS guidance, and industry best practices accordingly ensures that assessments adhere to the relevant standards and methodologies.
  • Accountability: Engaging an independent professional provides confidence that the AHVA will withstand scrutiny from third parties, including community members, planning inspectors, other professionals or judicial reviews. This accountability therefore helps safeguard the public interest and uphold the integrity of the planning process.
  • Consistency and comparability: Independent professionals ensure that methodologies and assumptions used in the AHVA are consistent with other assessments and comparable developments. This consistency therefore allows planning authorities to make informed and consistent decisions based on a fair and accurate assessment of each project’s viability.

The Role of Independent Professionals

Independent professionals play a critical role in every stage of the AHVA process:

  • Gathering market evidence: Independent experts collect relevant data, such as sale prices, rents, and construction costs. This ensures accurate assumptions are used in the assessment.
  • Analysing financial feasibility: Professionals use their expertise to evaluate the project’s financial viability, considering factors like development costs, land value, and projected revenues.
  • Conducting sensitivity analysis: Independent professionals assess the impact of changes in key variables, such as construction costs or sale prices, on the project’s viability.
  • Preparing reports and justifications: Experts compile comprehensive reports detailing their findings and provide well-supported justifications for any proposed reductions in affordable housing obligations.

Independent Professionals: A Vital Component of the AHVA Process

The independence of professionals plays an essential role in ensuring that Affordable Housing Viability Assessments are objective, accurate, and credible. Their expertise, objectivity, and familiarity with industry standards contribute to a more reliable and trustworthy assessment. By engaging the services of independent professionals, developers and planning authorities can work together to create sustainable, inclusive, and economically viable developments that cater to the diverse needs of local communities.

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Benchmark Land Valuation: Establishing a Reasonable Land Value

In the context of Affordable Housing Viability Assessments, it is essential to understand the difference between benchmark land valuation and price paid for land. These two concepts play a crucial role in determining the financial feasibility of a development project and its affordable housing provision.

Benchmark land valuation, also known as the threshold land value or benchmark value, is the minimum value at which a landowner would be willing to sell their land for development to a willing buyer. It takes into account the existing use value of the land, plus a premium to incentivise the landowner to release it for development.

In the AHVA process, you must use benchmark valuation to determine whether the proposed development is financially viable. If the residual land value (the value of the land after accounting for development costs and profit) is equal to or greater than the benchmark valuation, we identify that development is viable, and it is more likely that the landowner or developer will proceed with the project and contribute to affordable housing.

Price Paid: The Actual Transaction Price for Land

Price paid refers to the actual price that a developer has paid to acquire the land for their development project. In some cases, the price paid for land may be higher than the benchmark valuation, as developers may be willing to pay a premium to secure a desirable site or in order to outbid competitors. When another buyer is prepared to buy the site at a lower price, and in the case when save for the higher offer, you normally see the seller is willing to sell at that lower price if a higher offer hadn’t been made. The price paid, cannot be used as the ‘benchmark’ in viability in planning for this reason.

Implications for Affordable Housing Viability Assessments: How Benchmark Valuation and Price Paid Influence AHVAs

The distinction between benchmark valuation and price paid is crucial in the context of AHVAs for several reasons:

  • Financial Viability Assessment: Benchmark valuation is a key factor in determining the financial viability of a development project. When the residual land value is lower than the benchmark valuation, the development is considered unviable. This in turn could lead to reduced affordable housing provision or commuted sum payments.
  • Accurate Assumptions: Using the appropriate benchmark valuation rather than the price paid for land ensures that AHVAs are based on reasonable and justifiable assumptions. This helps to maintain the credibility and accuracy of the assessment and reduces the likelihood of disputes or challenges.
  • Fairness and Transparency: By focusing on benchmark valuation instead of price paid, AHVAs promote fairness and transparency in the planning process. This approach ensures that developers cannot use inflated land acquisition costs to justify reduced affordable housing contributions.
  • Encouraging Sustainable Development: Relying on benchmark valuation encourages developers to approach land acquisition and project planning with the broader public interest in mind. 

In conclusion, understanding the difference between benchmark valuation and price paid is vital in the context of AHVAs. By focusing on benchmark valuation, we can ensure that AHVAs are accurate, credible, and support the delivery of sustainable and inclusive communities. Developers of course, do need to use ‘price paid’ in their own business case – but it’s important to understand that the premium (or in some cases deficit) of price paid over the benchmark value, is part of the risk a developer takes in pursuit of making profits on the development.

Gross Development Value: A Key Metric in Affordable Housing Viability Assessments

In the context of Affordable Housing Viability Assessments (AHVAs), understanding the concept of Gross Development Value (GDV) is essential. GDV is a critical metric used to assess the financial viability of a development project. It plays a significant role in determining the extent of affordable housing contributions that a developer can reasonably provide.

The estimated market value of a development project once it is completed and fully occupied or sold, is the Gross Development Value. In other words, GDV represents the total value of the development when it is ready for use or sale in the open market. GDV is an essential metric in the property development process, as it provides developers, investors, and planning authorities with a clear understanding of the potential value of a project.

How is GDV Calculated? Factors Influencing the Estimation of Gross Development Value

Calculating the GDV of a development project involves taking into account various factors, such as:

  • Property type: Different types of properties (e.g., residential, commercial, or mixed-use) have distinct market values. These values will subsequently influence the overall GDV of the development.
  • Market conditions: Supply and demand, property prices, and rental values all influence the prevailing market conditions. Market conditions consequently impact the GDV.
  • Location: The development’s location plays a crucial role in determining its value. As properties in prime or desirable areas typically command higher prices.
  • Development size and scale: The total number of units and the size of the development also affect the GDV. Larger projects with more units can have different values to smaller bespoke projects.
  • Quality and specification: The quality and specification of the development, can significantly impact the GDV.

GDV and Affordable Housing Viability Assessments: The Role of GDV in Determining Affordable Housing Contributions

In the context of AHVAs, GDV plays a crucial role in assessing the financial feasibility of a development project. GDV impacts the capacity of a development to provide affordable housing. Henceforth, let’s look at how GDV is utilised in the AHVA process:

  • Assessing financial viability: By comparing the GDV with the total development costs, it is possible to determine whether a project is financially viable. Development costs include including land acquisition, construction, financing, and other associated expenses.
  • Calculating residual land value: We must use GDV to calculate the residual land value. Residual land value, is the value of the land after accounting for development costs and the developer’s required profit margin. 
  • Negotiating affordable housing contributions: GDV is a critical factor in negotiations between developers and planning authorities. Understanding GDV also helps determine the appropriate level of affordable housing provision or commuted sum payments. This additionally ensures that a developer can reasonably provide without jeopardising the project’s financial viability.

In summary, Gross Development Value is a vital metric in the property development process. GDV plays a critical role in Affordable Housing Viability Assessments.

What Next?

Are you in need of a comprehensive and reliable Affordable Housing Viability Assessment? Trust the experts at ET Planning to provide you with an unbiased and accurate assessment. We can ensure compliance with National Planning Policy Guidance and RICS guidance on valuation in Planning. We are a team of independent professionals, committed to delivering the highest standard of service. ET Planning can help you navigate the complexities of the planning process with confidence.

Get in touch with ET Planning today! Let us support you in achieving your development goals while contributing to sustainable and inclusive communities.

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