Community Infrastructure Levy Economic Viability Study The City of Cardiff Council

 
Community Infrastructure Levy Economic Viability Study The City of Cardiff Council
Community Infrastructure Levy
                                                   Economic Viability Study

                                                                The City of Cardiff Council
                                                                                                   Final Report

                                                                          On behalf of City   of Cardiff Council

Project Ref: 27818 | Rev: 03 | Date: August 2014

Office Address: 10 Queen Square, Bristol, BS1 4NT
T: +44 (0)117 928 1560 F: +44 (0)117 928 1570 E: bristol@peterbrett.com
Community Infrastructure Levy Economic Viability Study The City of Cardiff Council
Economic Viability Study
City of Cardiff Council

Document Control Sheet
Project Name: Cardiff Council Viability and Preliminary Draft Charging Schedule
Project Ref:    27818
Report Title:   Community Infrastructure Levy Economic Viability Study
Doc Ref:        Final Report
Date:           August 2014

                                Name                Position           Signature             Date

                                 Tom
                                               Graduate Planner/
                            Marshall/Mark
    Prepared by:                               Associate/Senior             TM           August 2014
                            Felgate/Russell
                                                  Associate
                                Porter

    Reviewed by:             John Baker              Partner                JB           August 2014

    Approved by:             John Baker              Partner                JB           August 2014

                                For and on behalf of Peter Brett Associates LLP

  Revision        Date                    Description              Prepared      Reviewed   Approved

                                                                     TM/
     01         July 2013                 Draft Report                             JB           JB
                                                                    MF/RP
                                                                     TM/
     01         July 2014              Draft Final Report                          JB           JB
                                                                    MF/RP
                                                                     TM/
     01         Aug 2014                  Final Report                             JB           JB
                                                                    MF/RP

Peter Brett Associates LLP disclaims any responsibility to the Client and others in respect of any
matters outside the scope of this report. This report has been prepared with reasonable skill, care and
diligence within the terms of the Contract with the Client and generally in accordance with the
appropriate ACE Agreement and taking account of the manpower, resources, investigations and
testing devoted to it by agreement with the Client. This report is confidential to the Client and Peter
Brett Associates LLP accepts no responsibility of whatsoever nature to third parties to whom this
report or any part thereof is made known. Any such party relies upon the report at their own risk.

© Peter Brett Associates LLP 2014

                                                                                                       ii
Economic Viability Study
City of Cardiff Council

Contents
1     Introduction ................................................................................................................................. 1
        1.1         The study scope ............................................................................................................ 1
        1.2         Relationship with other evidence base .......................................................................... 1
        1.3         Objectives ...................................................................................................................... 1
2     Study Context and Viability ........................................................................................................ 3
        2.1         Introduction .................................................................................................................... 3
        2.2         Defining viability: the Harman Report ............................................................................ 3
        2.3         National policy on CIL ................................................................................................... 3
        2.4         What the CIL examiner will be looking for ..................................................................... 7
        2.5         Summary ....................................................................................................................... 8
3     Local Development Context ..................................................................................................... 10
        3.1         Introduction .................................................................................................................. 10
        3.2         Past development patterns .......................................................................................... 10
        3.3         Affordable housing....................................................................................................... 12
        3.4         Future development..................................................................................................... 13
4     Viability Assessment Method .................................................................................................. 14
        4.1         Approach to the development viability appraisals ....................................................... 14
        4.2         Benchmark land values ............................................................................................... 15
        4.3         Consultation ................................................................................................................. 15
5     Residential Market and Viability Analysis .............................................................................. 17
        5.1         Market overview .......................................................................................................... 17
        5.2         Typologies ................................................................................................................... 20
        5.3         Residential viability assumptions ................................................................................. 23
        5.4         Residential viability analysis ........................................................................................ 29
        5.5         Residential recommendations ..................................................................................... 31
6     Non-residential Market Assessment and Viability ................................................................. 32
        6.1         Approach ..................................................................................................................... 32
        6.2         Future development type ............................................................................................. 32
        6.3         Typologies ................................................................................................................... 33
        6.4         Establishing gross development value (GDV) ............................................................. 36
        6.5         Development Costs ..................................................................................................... 40
        6.6         Land for non-residential uses ...................................................................................... 43
7     Non Residential Viability Analysis .......................................................................................... 45
        7.1         Introduction .................................................................................................................. 45
        7.2         Retail uses ................................................................................................................... 45
        7.3         B-class uses ................................................................................................................ 48
        7.4         Care homes ................................................................................................................. 48
        7.5         Student accommodation .............................................................................................. 49

                                                                                                                                                      iii
Economic Viability Study
City of Cardiff Council

           7.6         Leisure development ................................................................................................... 49
           7.7         Other non-residential development ............................................................................. 50
           7.8         Non-residential recommendations ............................................................................... 50
8        CIL Recommendations ............................................................................................................. 51
           8.1         Viability findings ........................................................................................................... 51

Figures
Figure 4.1: Method diagram: value of completed development scheme .............................................. 14
Figure 5.1 Average house prices in key settlements in South Wales ................................................... 17
Figure 5.2 Five Year forecast values, 2014-2018 ................................................................................. 17
Figure 5.3 Potential headroom for CIL by development type and area ................................................ 29
Figure 7.1 Potential headroom for CIL by different retail uses .............................................................. 48

Tables
Table 3.1 Residential completions 2006-2014 ...................................................................................... 10
Table 3.2 Gross permission by size of site 2006-2013 (data provided by the council) ......................... 11
Table 3.3 Development types (completions) (data provided by the council) ........................................ 11
Table 3.4 Dwelling completion by type (completions) (data provided by the council)........................... 12
Table 3.5 Private and Affordable completions (data provided by the council) ...................................... 12
Table 3.6 Strategic residential sites ...................................................................................................... 13
Table 5.1 Average Sales values in South Wales .................................................................................. 18
Table 5.2 New house on market (April 2013) ........................................................................................ 19
Table 5.3 Average house and flat prices paid (new and second-hand market) .................................... 20
Table 5.4 Residential typologies and dwelling mix ................................................................................ 22
Table 5.5 Dwelling sizes, sqm per unit .................................................................................................. 23
Table 5.6 Assumed open market sales values, per sqm at 2Q 2014 .................................................. 25
Table 5.7 Residential viability results .................................................................................................... 30
Table 6.1 City centre retail rents at 2013 .............................................................................................. 37
Table 6.2 Retail warehouses rents at 2013 ........................................................................................... 38
Table 6.3 Central location office rents at 2013 ...................................................................................... 38
Table 6.4 Out of town office rents at 2013 ............................................................................................ 39
Table 6.5 Non-residential uses – rent and yields .................................................................................. 39
Table 6.6 Non-residential uses by size and site coverage ratios .......................................................... 41
Table 6.7 Non Residential Uses – Build Costs...................................................................................... 41
Table 6.8 COSTAR land transactional values ....................................................................................... 43
Table 6.9 Existing land values for non-residential uses ........................................................................ 44
Table 7.1 Central area convenience/comparison viability ..................................................................... 46
Table 7.2 Edge of centre convenience/comparison viability ................................................................. 46
Table 7.3 Supermarkets viability ........................................................................................................... 47
Table 7.4 Retail warehouse viability ...................................................................................................... 47
Table 7.5 Local convenience viability .................................................................................................... 47
Table 7.6 B-class development viability ................................................................................................ 48
Table 7.7 Care homes viability .............................................................................................................. 49
Table 7.8 Student accommodation viability ........................................................................................... 49
Table 7.9 Hotel viability levy .................................................................................................................. 49
Table 7.10 Mixed leisure viability .......................................................................................................... 50
Table 8.1 The City of Cardiff recommended CIL charging rates ........................................................... 51

                                                                                                                                                      iv
Economic Viability Study
City of Cardiff Council

Appendices
Appendix A     Example of a residential appraisal
Appendix B     Example of a non-residential appraisal
Appendix C     Development industry workshop notes

                                                        v
Economic Viability Study
City of Cardiff Council

1       Introduction
1.1     The study scope
1.1.1   Peter Brett Associates LLP was commissioned by the City of Cardiff Council (hereafter
        “Cardiff Council” or “the Council”) to undertake an Economic Viability Assessment to provide
        evidence and advice to support the introduction of a Community Infrastructure Levy in Cardiff.

1.1.2   Our objective in this study is to help inform the decisions by locally elected members about the
        risk and balance between the policy aspirations of achieving sustainable development and the
        realities of economic viability. In making their decision on the balance, members are seeking
        guidance on the maximum level of development contributions, including potential for a
        Community Infrastructure Levy (CIL).

1.1.3   The report and the accompanying appraisals have been prepared in line with RICS valuation
        guidance. However, it is first and foremost a supporting document to inform the drafting of the
        developer contributions/CIL evidence base and planning policy, in particular policy concerned
        with the planning, funding and delivery of infrastructure needed to support delivery of the plan.
                                                                                                     1
1.1.4   As per Professional Standards 1 of the RICS Valuation Standards – Global and UK Edition ,
        the advice expressly given in the preparation for, or during the course of negotiations or
        possible litigation does not form part of a formal “Red Book” valuation and should not be relied
        upon as such. No responsibility whatsoever is accepted to any third party who may seek to
        rely on the content of the report for such purposes.

1.2     Relationship with other evidence base
1.2.1   In addition to this report PBA prepared an earlier report on the overall delivery of Cardiff’s
        Local Development Plan. This report is based on the information contained within the earlier
        report and updated where appropriate.

1.3     Objectives
1.3.1   The objectives of this report are to use the available evidence to assess what level of CIL is
        appropriate within Cardiff and that is broadly viable in terms of delivering the plans and
        policies set out in its strategy. The stages of the study are to:

         Review the policy and legislative context

         Review the types of development likely to come forward during the plan period

         Consider the evidence relating to the costs and values of different residential and non-
          residential development in Cardiff and establish assumptions to inform both residential and
          non-residential viability appraisals

         Provide evidence for the council in developing their Community Infrastructure Levy (CIL)
          Charging Schedule

        1
         RICS (January 2014) Valuation – Professional Standards, PS1 Compliance with standards
        and practice statements where a written valuation is provided.

                                                                                                         1
Economic Viability Study
City of Cardiff Council

        In providing this evidence undertake a series of viability tests on the hypothetical
         development typologies and the Council’s proposed strategic sites and consider whether
         there is sufficient value to support policies including those on affordable housing and CIL.

                                                                                                        2
Economic Viability Study
City of Cardiff Council

2       Study Context and Viability
2.1     Introduction
2.1.1   The basis of viability testing in this Report is through a series of generic site appraisals, using
        the residual value (RV) approach. This needs to take account of a wide variety of inter-related
        factors which are explored below, which include various items of planning obligations and
        community gain expected to be delivered through the operation of the planning system.

2.1.2   The key question is whether a suggested level of Community Infrastructure Levy (CIL),
        combined with other planning obligations, including affordable housing and other policy
        requirements will inhibit development generally, and conversely, what level of CIL, and
        continuing contributions through S.106 Agreements, can be delivered whilst maintaining
        economic viability?

2.1.3   It is important that policy relating to planning obligations is realistic and credible, taking into
        account the local housing and commercial market, the economics of development, including
        price, supply, demand, need and profit issues. Whilst this report is set within the known
        planning and economic context at the time of production, it will be important to update its
        assumptions and findings when there are significant changes to the market and economy or
        changes to the type of growth sought in the county.

2.1.4   It is also of note that the importance of maintaining plan viability is a central theme of national
        planning policy and guidance in recent years across England and Wales. We explore this
        context in the following section.

2.2     Defining viability: the Harman Report
2.2.1   The cross industry and CLG supported ‘Viability Testing Local Plans’ (June 2012) provides
        detailed guidance regarding viability testing and in particular provides practical advice for
        planning practitioners on developing viable Local Plans which limits delivery risk. This
        guidance forms the basis to our approach in this report.

2.2.2   The Harman Report usefully defines viability. 'Viability Testing Local Plans' (Local housing
        Delivery Group, June 2012), states that:

        “An individual development can be said to be viable if, after taking account of all costs,
        including central and local government policy and regulatory costs, and the cost and
        availability of development finance, the scheme provides a competitive return to the developer
        to ensure that development takes place, and generates a land value sufficient to persuade the
        land owner to sell the land for the development proposed.”

2.2.3   Although prepared with the support of CLG there is no reason as to why the principles set out
        in Harman should not be applicable in Wales.

2.3     National policy on CIL
2.3.1   CIL is a planning charge based on legislation that came into force on 6 April 2010. The levy
        allows local authorities in England and Wales to raise contributions from development to help
        pay for infrastructure that is needed to support planned development. Local authorities who
        wish to charge the levy must produce a draft charging schedule setting out CIL rates for their
        areas – which are to be expressed as pounds (£) per square metre, as CIL will be levied on
        the gross internal floorspace of the net additional liable development. Before it is approved by
        the Council, the draft schedule has to be tested by an independent examiner.

                                                                                                              3
Economic Viability Study
City of Cardiff Council

2.3.2       CIL is not devolved to Wales and that the guidance and regulations are prepared by the CLG
            and Welsh Government as set out in:

             The Planning Act 2008 as amended by the Localism Act 2011.
                                               2                             3     4        5             6
             The CIL Regulations 2010 , as amended in 2011 , 2012 , 2013 and 2014 .

             The CIL Guidance which was updated and published in February 2014 and since replaced
                                                                        7 8
              by National Planning Practice Guidance on CIL (NPPG CIL).

2.3.3       The 2014 Regulations have altered key aspects of setting the charge for authorities who
            publish a Draft Charging Schedule for consultation. The key points from these various
            documents are summarised below.

            Striking the appropriate balance
2.3.4       The revised Regulation 14 requires that a charging authority ‘strike an appropriate balance’
            between:

            a.    The desirability of funding from CIL (in whole or in part) the… cost of infrastructure
                  required to support the development of its area… and

            b.    The potential effects (taken as a whole) of the imposition of CIL on the economic viability
                  of development across its area.

2.3.5       By itself, this statement is not easy to interpret. The guidance explains its meaning. A key
            feature of the 2014 Regulations is to give legal effect to the requirement in this guidance for an
            authority to ‘show and explain…’ their approach at examination. This explanation is important
            and worth quoting at length:

            ‘The levy is expected to have a positive economic effect on development across a local plan
            area. When deciding the levy rates, an appropriate balance must be struck between additional
            investment to support development and the potential effect on the viability of developments.

            This balance is at the centre of the charge-setting process. In meeting the regulatory
            requirements (see Regulation 14(1)), charging authorities should be able to show and explain
            how their proposed levy rate (or rates) will contribute towards the implementation of their
            relevant plan and support development across their area.

            As set out in the National Planning Policy Framework in England (paragraphs 173 – 177), the
            sites and the scale of development identified in the plan should not be subject to such a scale
            of obligations and policy burdens that their ability to be developed viably is threatened. The
                                              9
            same principle applies in Wales.’

2.3.6       In other words, the ‘appropriate balance’ is the level of CIL which maximises the delivery of
            development in the area. If the CIL charging rate is above this appropriate level, there will be

2
    http://www.legislation.gov.uk/ukdsi/2010/9780111492390/pdfs/ukdsi_9780111492390_en.pdf
3
    http://www.legislation.gov.uk/ukdsi/2011/9780111506301/pdfs/ukdsi_9780111506301_en.pdf
4
    http://www.legislation.gov.uk/uksi/2012/2975/pdfs/uksi_20122975_en.pdf
5
    http://www.legislation.gov.uk/uksi/2013/982/pdfs/uksi_20130982_en.pdf
6
    http://www.legislation.gov.uk/uksi/2014/385/pdfs/uksi_20140385_en.pdf
7
 DCLG (February 2014) Community Infrastructure Levy Guidance and DCLG (June 2014) National Planning Practice
Guidance: Community Infrastructure Levy (NPPG CIL)
8
  Since the Welsh Government advises that the Welsh authorities adhere to the CIL Guidance, it is therefore expected that the
replacement of the CIL Guidance by the NPPG CIL also applies in Wales.
9
    DCLG (June 2014) NPPG CIL (para 009).

                                                                                                                                4
Economic Viability Study
City of Cardiff Council

             less development than planned, because CIL will make too many potential developments
             unviable. Conversely, if the charging rates are below the appropriate level, development will
             also be compromised, because it will be constrained by insufficient infrastructure.

2.3.7        Achieving an appropriate balance is a matter of judgement. It is not surprising, therefore, that
             charging authorities are allowed some discretion in this matter. This has been reduced by the
             2014 Regulations, but remains. For example, Regulation 14 requires that in setting levy rates,
             the Charging Authority (our underlining highlights the discretion):

             ‘must strike an appropriate balance…’ i.e. it is recognised there is no one perfect balance;

             ‘Charging authorities need to demonstrate that their proposed levy rate or rates are informed
             by ‘appropriate available’ evidence and consistent with that evidence across their area as a
             whole.’

             ‘A charging authority’s proposed rate or rates should be reasonable, given the available
             evidence, but there is no requirement for a proposed rate to exactly mirror the evidence ……
                                                   10
             There is room for some pragmatism.’

2.3.8        Thus the guidance sets the delivery of development firmly in within the context of
             implementing the Local Plan. This is linked to the plan viability requirements of the NPPF,
             particularly paragraphs 173 and 174. This point is given emphasis throughout the guidance.
             For example, in guiding examiners, the guidance makes it clear that the independent
             examiner should establish that:

             ‘…..evidence has been provided that shows the proposed rate (or rates) would not threaten
                                                          11
             delivery of the relevant Plan as a whole…..’

2.3.9        This also makes the point that viability is not simply a site specific issue but one for the plan as
             a whole.

2.3.10 The focus is on seeking to ensure that the CIL rate does not threaten the ability to develop
       viably the sites and scale of development identified in the Local Plan. Accordingly, when
       considering evidence the guidance requires that charging authorities should:

             ‘use an area based approach, involving a broad test of viability across their area’,
             supplemented by sampling ‘…an appropriate range of types of sites across its area…’ with the
             focus ‘...on strategic sites on which the relevant Plan relies and those sites where the impact
                                                                                                            12
             of the levy on economic viability is likely to be most significant (such as brownfield sites).

2.3.11 This reinforces the message that charging rates do not need to be so low that CIL does not
       make any individual development schemes unviable (some schemes will be unviable with or
       without CIL). The levy may put some schemes at risk, however, in aiming to strike an
       appropriate balance overall, the charging authority should avoid threatening the ability to
       develop viably the sites and scale of development identified in the Local Plan.

             Keeping clear of the ceiling
2.3.12 The guidance advises that CIL rates should not be set at the very margin of viability, partly in
       order that they may remain robust over time as circumstances change:

10
     DCLG (June 2014) NPPG CIL (para 019)
11
     Ibid (para 038)
12
     Ibid (para 019)

                                                                                                                5
Economic Viability Study
City of Cardiff Council

             ‘…..if the evidence pointed to setting a charge right at the margins of viability………it would be
             appropriate to ensure that a ‘buffer’ or margin is included, so that the levy rate is able to
                                                                            13
             support development when economic circumstances adjust.’

2.3.13 We would add two further reasons for a cautious approach to rate-setting, which stops short of
       the margin of viability:

             Values and costs vary widely between individual sites and over time, in ways that cannot
              be fully captured by the viability calculations in the CIL evidence base.

             A charge that aims to extract the absolute maximum would be strenuously opposed by
              landowners and developers, which would make CIL difficult to implement and put the
              overall development of the area at serious risk.

             Varying the CIL charge
2.3.14 CIL Regulations (Regulation 13) allows the charging authority to introduce charge variations
       by geographical zone in its area, by use of buildings, by scale of development (GIA of
       buildings or number of units) or a combination of these three factors. (It is worth noting that
                                                                                   14
       the phrase ‘use of buildings’ indicates something distinct from ‘land use’). As part of this,
       some rates may be set at zero. But variations must reflect differences in viability; they cannot
       be based on policy boundaries. Nor should differential rates be set by reference to the costs of
       infrastructure.

2.3.15 The guidance also points out that charging authorities should avoid ‘undue complexity’ when
       setting differential rates, and ‘….it is likely to be harder to ensure that more complex patterns
                                                         15
       of differential rates are state aid compliant.’

2.3.16 Moreover, generally speaking, ‘Charging schedules with differential rates should not have a
       disproportionate impact on particular sectors or specialist forms of development’; otherwise
                                                 16
       the CIL may fall foul of state aid rules.

2.3.17 It is worth noting, however, that the guidance gives an example which makes it clear that a
       strategic site can be regarded as a separate charging zone: ‘If the evidence shows that the
       area includes a zone, which could be a strategic site, which has low, very low or zero viability,
                                                                                             17
       the charging authority should consider setting a low or zero levy rate in that area.’

             Supporting evidence
2.3.18 The legislation requires a charging authority to use ‘appropriate available evidence' to inform
                                18
       their charging schedule . The guidance expands on this, explaining that the available data ‘is
                                            19
       unlikely to be fully comprehensive’.

2.3.19 These statements are important, because they indicate that the evidence supporting CIL
       charging rates should be proportionate, avoiding excessive detail. One implication of this is
       that we should not waste time and cost analysing types of development that will not have

13
     Ibid (para 019)
14
  The Regulations allow differentiation by “uses of development”. “Development” is specially defined for CIL to include only
‘buildings’, it does not have the wider ‘land use’ meaning from TCPA 1990, except where the reference is to development of the
area.
15
     DCLG (June 2014) NPPG CIL (para 021)
16
     Ibid (para 021)
17
     Ibid (para 021)
18
     Planning Act 2008 section 211 (7A)
19
     DCLG (June 2014) NPPG CIL (para 019)

                                                                                                                             6
Economic Viability Study
City of Cardiff Council

        significant impacts, either on total CIL receipts or on the overall development of the area as
        set out in the Local Plan.

        Chargeable floorspace
2.3.20 CIL will be payable on most buildings that people normally use and will be levied on the net
       additional new build floorspace created by any given development scheme. The following will
       not pay CIL:

         New build that replaces demolished existing floorspace that has been in use for six months
          in the last three years on the same site, even if the new floorspace belongs to a higher-
          value use than the old;

         Retained parts of buildings on the site that will not change their use, or have otherwise
          been in use for six months in the last three years;

         Development of buildings with floorspace less than 100 sqm (if not a new dwelling), by
          charities for charitable use, homes by self-builders’ and social housing as defined in the
          regulations.

        CIL, S106, S278 and the regulation 123 infrastructure list
2.3.21 The purpose of CIL is to enable the charging authority to carry out a wide range of
       infrastructure projects. CIL is not expected to pay for all infrastructure requirements but could
       make a significant contribution. However, development specific planning obligations
       (commonly known as S106) to make development acceptable will continue with the
       introduction of CIL. In order to ensure that planning obligations and CIL operate in a
       complementary way, CIL Regulations 122 and 123 place limits on the use of planning
       obligations.

2.3.22 Some developers have expressed concerns about ‘double dipping’ (i.e. being charged twice
       for the same infrastructure by requiring the paying of CIL and S106). To overcome this
       concern, it is imperative that charging authorities are clear about the authorities’ infrastructure
       needs and what developers will be expected to pay for and through which route. The
       guidance expands this further in explaining how the regulation 123 list should be scripted to
       account for generic projects and specific named projects).

2.3.23 The guidance states that ‘it is good practice for charging authorities to also publish their draft
       (regulation 123) infrastructure lists and proposed policy for the scaling back of S106
       agreements.’ This list now forms part of the ‘appropriate available evidence’ for consideration
       at the CIL examination.

2.3.24 The guidance identifies the need to assess past evidence on developer contributions, stating
       ‘as background evidence, the charging authority should also provide information about the
       amount of funding collected in recent years through section 106 agreements, and information
       on the extent to which affordable housing and other targets have been met’.

2.3.25 Similarly, there are restrictions on using section 278 highway agreements to fund
       infrastructure that is also included in the CIL infrastructure list. This is done by placing a limit
       on the use of planning conditions and obligations to enter into section 278 agreements to
       provide items that appear on the charging authority’s Regulation 123 infrastructure list. Note
       these restrictions do not apply to highway agreements drawn up the Highway Agency.

2.4     What the CIL examiner will be looking for
2.4.1   According to the guidance, the independent examiner should check that:

                                                                                                              7
Economic Viability Study
City of Cardiff Council

             The charging authority has complied with the requirements set out in legislation.

             The draft charging schedule is supported by background documents containing appropriate
              available evidence.

             The proposed rate or rates are informed by and consistent with the evidence on economic
              viability across the charging authority's area.

             Evidence has been provided that shows the proposed rate or rates would not threaten
              delivery of the relevant Plan as a whole.

2.4.2        The examiner must recommend that the draft charging schedule should be approved, rejected
             or approved with specific modifications.

             Policy and other requirements
2.4.3        CIL is not devolved to Wales and that the guidance and regulations are prepared by the CLG
             and Welsh Government. More broadly, the CIL guidance states that ‘Charging authorities
                                                                                                      20
             should consider relevant national planning policy when drafting their charging schedules’ .
             Where consideration of development viability is concerned, the CIL guidance draws specific
             attention to paragraphs 173 to 177 of the NPPF and to paragraphs 162 and 177 of the NPPF
             in relation to infrastructure planning.

2.4.4        The only policy requirements which refer directly to CIL in the NPPF are set out at paragraph
             175 of the NPPF, covering, firstly, working up CIL alongside the plan making where practical;
             and secondly placing control over a meaningful proportion of funds raised within
                                                                                  21
             neighbourhoods where development takes place. Since April 2013 this policy requirement
             has been complemented with a legal duty on charging authorities to pass a specified
             proportion of CIL receipts to local communities, or to spend it on behalf of the neighbourhood
             if there is no local community for the area where development takes place. Whilst important
             considerations, these two points are outside the immediate remit of this study.

2.5          Summary
2.5.1        To meet legal requirements and satisfy the independent examiner, a CIL charging schedule
             published as a Draft for consultation after 24 February 2014, (when the 2014 CIL Regulations
             Amendments became law) should aim to strike a balance between additional investment to
             support development and the potential effect on the viability of developments.

2.5.2        This means that the net effect of the levy on total development across the area should be
             positive. CIL may reduce development by making certain schemes which are not plan
             priorities unviable. Conversely, it may increase development by funding infrastructure that
             would not otherwise be provided, which in turn supports development that otherwise would not
             happen. The law requires that the net outcome of these two impacts should be judged to be
             positive. This judgement is at the core of the charge-setting and examination process.

2.5.3        Legislation and guidance also set out that:

             Authorities should avoid setting charges up to the margin of viability.

             CIL charging rates may vary across geographical zones, building uses, and by scale of
              development. But differential charging must be justified by differences in development
              viability, not by policy or by varying infrastructure costs; it should not introduce undue
              complexity; and it should have regard to State Aid rules.

20
     Ibid (para 011)
21
     http://www.legislation.gov.uk/uksi/2013/982/pdfs/uksi_20130982_en.pdf

                                                                                                              8
Economic Viability Study
City of Cardiff Council

         Charging rates should be informed by ‘appropriate available evidence’, which need not be
          ‘fully comprehensive’.

         Charging authorities should be clear and transparent about the use of different approaches
          to developers funding infrastructure and avoid ‘double dipping’.

2.5.4   While charging rates should be consistent with the evidence, they are not required to ‘mirror’
        the evidence. In this, and other ways, charging authorities have discretion in setting charging
        rates.

                                                                                                          9
Economic Viability Study
City of Cardiff Council

3       Local Development Context
3.1     Introduction
3.1.1   This chapter briefly outlines the local development context in Cardiff by reviewing past
        development that has taken place, and outlining the planned growth in the emerging Plan.
        This development context has informed the viability appraisal assumptions.

3.2     Past development patterns
3.2.1   Patterns of past development can normally provide a guide to the likely patterns of future
        development. Table 3.1 below analyses the amount of net residential completions over the
        period 2006 to 2014. The completions rate shows the impact of the recent recession as the
        average completion rate falls considerably in the years after 2008, with completions in the last
        two years almost half of the 2009/10 rate and a third of the 2008/09 figure.

3.2.2   Compared to what is required, the (Deposit) Cardiff Local Development Plan (LDP) identifies
        in policy KP1 the need for a provision of 41,100 new dwellings between the plan period of
        2006 – 2026; approximately 2,055 per year. Table 3.1 also identifies the cumulative
        completion rate of the last 8 years of the plan period, noting that 9,267 homes have been
        completed so far with a further c.10,000 in the development pipeline with planning consent.

3.2.3   To meet the targets of 41,100, the Deposit Plan does require a higher level of housing growth
        and the council should be mindful of this in setting its CIL policy.

        Table 3.1 Residential completions 2006-2014

        Year (ending March)                            Completions         Cumulative Completions

        2006/07                                                 2,368                               2,368
        2007/08                                                 2,028                               4,396
        2008/09                                                 1,517                               5,913
        2009/10                                                   867                               6,780
        2010/11                                                   959                               7,739
        2011/12                                                   560                               8,299
        2012/13                                                   474                               8,773
        *2013/14                                                  494                               9,267
        Source: Cardiff County Council Background Technical Paper No.1 Population and Housing (Appendix 2)
        * Latest figure supplied by Wales.gov, New house building in Wales, January to March 2014

        Scale and type of past delivery
3.2.4   Table 3.2 shows the scale of applications permitted between 2006 and 2013. This shows that
        that the vast majority of the supply has come from larger sites of over 10 dwellings. The figure
        of housing permitted in smaller sites, of less than ten dwellings, as remained fairly constant
        throughout the period, whilst the permissions granted on sites of over 10 dwellings has
        fluctuated more so.

                                                                                                             10
Economic Viability Study
City of Cardiff Council

        Table 3.2 Gross permission by size of site 2006-2013 (data provided by the council)

            Year (ending            Windfalls (10 or                Small Sites        Changes of Use to
            March)                            more)                       (
Economic Viability Study
City of Cardiff Council

        Table 3.4 Dwelling completion by type (completions) (data provided by the council)

          Year (ending March)                             Houses                        Flats

          2006/07                                                 727                        1,641
          2007/08                                                 718                        1,310
          2008/09                                                 450                        1,070
          2009/10                                                 279                         588
          2010/11                                                 230                         729

          2011/12                                                 234                         326
          2012/13                                                 212                         262
                                                                 32%                          68%
        Source: Cardiff County Council: (Cardiff Housing Monitoring Schedule, March 2013)

3.2.7   However, this is a reflection of the past situation. Moving forward, the LDP identifies a range
        of large Greenfield strategic sites which will significantly change the balance of housing supply
        in the future, as explored later in this section.

3.3     Affordable housing
3.3.1   The number of affordable housing units completed has also been considered. The Cardiff
        Local Development Plan 2006–2026, deposit plan, highlights “significant need” for affordable
        housing, citing 9170 people currently on combined housing waiting list as at September 2013.
        The deposit plan outlines the affordable housing target as 6,953 over the remainder of the
        plan period, equating to 535 per annum.

3.3.2   The headline figure for affordable housing completions as a proportion of total supply between
        the period 2006 to 2013 is 16%, which equates to an average of 201 affordable dwellings
        provided per annum. Therefore, it can be seen that recent trends in delivery lag some way
        behind the plan targets.

        Table 3.5 Private and Affordable completions (data provided by the council)

                                           2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

         Private                              2,022         1,834        1,305           564         812   442   381
         Affordable                              346          194           212          303         147   118    93
         Total                                2,368         2,028        1,517           867         959   560   474
         Yearly average of AH
                                                15%          10%           14%          35%          15%   21%   20%
         as a proportion of total

        Source: Cardiff Council (Cardiff Housing Monitoring Schedule, March 2013)

3.3.3   The Council have set out their affordable housing requirements in Policy H3 of the Cardiff
        local development plan 2006 – 2026 deposit plan. This outlines that new developments will
        seek 20% affordable housing on brownfield sites and 30% affordable housing on Greenfield
        sites on all developments either containing 10 or more dwellings or exceeding 0.3 hectares in
        gross site area.

                                                                                                                  12
Economic Viability Study
City of Cardiff Council

3.3.4   For the purpose of the study we have used the following Affordable Housing tenure split:

         Social rented – 40%

         Intermediate – 40%

         Low Cost Home Ownership (LCHO) – 20%

3.4     Future development
3.4.1   As discussed previously the housing need in Cardiff for the plan period 2006-2026 is 41,100
        new dwellings, or 2,055 dwellings per year.

3.4.2   The local development plan identifies a number of strategic sites in order to meet this need in
        Table 3.6 below. In total, the strategic sites detail provision for 13,950 dwellings across the
        plan period.

        Table 3.6 Strategic residential sites

         Site                                                       No. of Dwellings
         Former Gas Works, Ferry Road                                              500

         North-West Cardiff                                                      5,000
         North of Junction 33 on M4                                              2,000
         South of Creigiau                                                         650
         North-East Cardiff                                                      4,500
         East of Pontprennau Link Road                                           1,300
        Source: Cardiff Council: Cardiff Local Development Plan 2006 – 2026 Deposit Plan

3.4.3   Aside from residential requirement, the LDP policy suggests that a range of employment and
        retail development is promoted in suitable locations across the Plan period. Other uses are
        likely to be required or promoted over the plan period, however in terms of floorspace and
        impact on infrastructure these are not considered to be as significant as the residential,
        employment and retail development identified above.

                                                                                                      13
Economic Viability Study
City of Cardiff Council

4          Viability Assessment Method
4.1        Approach to the development viability appraisals
4.1.1      Viability assessment is at the core of the charge-setting process. The purpose of the
           assessment is to identify charging rates at which the bulk of the development proposed in the
           development plan is financially viable, in order to ensure that the CIL does not put at risk the
           overall development planned for the area.

4.1.2      Our viability assessments are based on development appraisals of hypothetical schemes,
           using the residual valuation method. This approach is in line with accepted practice and as
                                             22                          23
           recommended by RICS guidance and the Harman report. Residual valuation is applied to
           different land uses and where relevant to different parts of the city, aiming to show typical
           values for each. It is based on the formula presented in Figure 4.1.

           Figure 4.1: Method diagram: value of completed development scheme

4.1.3      For each of the hypothetical schemes tested, we use this formula to estimate typical residual
           land values, which is what the site should be worth once it has full planning permission. The
           residual value calculation requires a wide range of inputs, or assumptions, including the costs
           of development and the required developer’s return.

4.1.4      The arithmetic of residual appraisal is straightforward (we use a bespoke spreadsheet models
           for the appraisals). However, the inputs to the calculation are hard to determine for a specific
           site (as demonstrated by the complexity of many S106 negotiations). The difficulties grow
           when making calculations that represent a typical or average site – which is what we need to
           do for estimating appropriate CIL Charges. Therefore our viability assessments are
           necessarily broad approximations, subject to a margin of uncertainty

4.1.5      An example of a residential viability appraisal is shown in Appendix A. Detailed individual
           appraisals for non-residential schemes are provided in Appendix B.

22
     RICS (2012), Financial Viability in Planning, RICS First Edition Guidance Note
23
     Local Housing Delivery Group Chaired by Sir John Harman (2012) Viability Testing Local Plans

                                                                                                           14
Economic Viability Study
City of Cardiff Council

4.1.6   Having estimated the residual value, we compare this residual value with the ‘benchmark land
        value’ or ‘land cost’, which is the minimum land value the landowner will accept to release
        their land for the development specified.

4.1.7   Benchmark values will vary to reflect the landowner’s judgements, which might include the
        contextual nature of development, the site density achievable, the approach to the delivery of
        affordable housing (in the context of residential development) and so on. There are a wide
        range of permutations here, but to make progress a central value has to be assumed, even
        though in practice there could be a margin of error. These values are discussed further in
        Section 5.

4.1.8   In the appraisals, if the achieved residual land value is:

           below the benchmark value, then the development is not financially viable even without
            CIL. That means it will not happen unless the circumstances change.

           equal to the benchmark value, the development is just viable but there is no surplus value
            available for CIL.

           above the benchmark value, the development is viable. The excess of residual over
            benchmark value measures the maximum amount that may be potentially captured by
            CIL. This then converts the amount available for CIL into a per square metre charge.

4.1.9   It is important to bear in mind that these calculations are no more than approximations,
        surrounded by margins of uncertainty but are based on best available evidence and
        judgement at the time of the appraisal. This uncertainty is taken account of in drawing the
        implications for CIL by using professional judgment to interpret the figures. This is explained
        below.

4.2     Benchmark land values
4.2.1   Establishing the existing use value (EUV) of land, and in setting a benchmark at which a
        landowner is prepared to sell to enable a consideration of viability, can be a complex process.
        There are a wide range of site specific variables which effect land sales (e.g. position of the
        landowner - are they requiring a quick sale or is it a long term land investment). However, for
        a strategic study, where the land values on future individual sites are unknown, a pragmatic
        approach is required.

4.2.2   Therefore as a starting point, we have looked at VOA data for serviced land in areas in Cardiff
        as well as any available transaction or sale price data. We also reviewed land currently being
        marketed on the UK Land Directory website, and have also been informed by discussion at
        the development industry workshop in May 2013. The purpose of this event was to outline the
        aims and likely impacts of CIL for development and to obtain feedback from planning agents
        and developers as well as the Council on the emerging viability study. Minutes from the
        workshop are at Appendix C.

4.2.3   It is important to appreciate that assumptions on benchmark land values can only be broad
        approximations, subject to a wide margin of uncertainty. This is taken into account when
        drawing conclusions and in the recommendations from the analysis and results. The
        benchmark land values for the tested developments informing the CIL Charge are explained
        and detailed in the following chapters on viability.

4.3     Consultation
4.3.1   In our experience, local agents and developers are always happy to explain where the market
        is at, what is going on, and why. The consultation with the development industry has helped

                                                                                                          15
Economic Viability Study
City of Cardiff Council

        to make our assumptions more robust, and these discussions also help us see where potential
        concerns may arise, so that the council can be better prepared to address concerns.

4.3.2   The key data discussed includes:

         Typologies;

         The density and mix of development;

         Estimated market values of completed development;

         Existing use and open market land values;

         Basic build cost;

         External works (% of build cost);

         Professional fees (% of build cost);

         Marketing & sales costs (% of development value);

         Finance costs (typical prevailing rates);

         Developer's margin (% of revenue).

4.3.3   We worked with the council to set up a Stakeholder meeting for the development industry
        active in the city and surrounding areas. This took place in May 2013 and was attended by
        developers and agents in addition to the consultants and Council officers. A copy of the
        meeting note can be found in Appendix C.

                                                                                                    16
Economic Viability Study
City of Cardiff Council

5       Residential Market and Viability Analysis
5.1     Market overview
5.1.1   The housing market in Cardiff continues to outperform many of its neighbours in South and
        South West Wales. Recent years, in particular, has seen a slight widening gap between
        Cardiff properties and neighbouring settlements. Table 5.1 shows that although average
        prices are lower in Cardiff than in locations around the Vale of Glamorgan, but this is likely to
        reflect the typical larger properties in these areas as opposed to the greater number of flatted
        developments in Cardiff in recent years.

        Figure 5.1 Average house prices in key settlements in South Wales

        Source: Land registry

5.1.2   Looking forward, the latest projections of house prices prepared by Savills in their Residential
        Property Focus (Q2 2014), shows a 21% increase in values in Wales over the next five years,
        which is slightly below their expectations for the UK at 25%. Based on the characteristics of
        the local market, Cardiff is likely to over-perform the Wales national average.

        Figure 5.2 Five Year forecast values, 2014-2018

         Source: Savills, May 2014

5.1.3   In comparison with other areas in Wales, house prices in Cardiff are above the average prices
        achieved. The table below illustrates these differences.

                                                                                                        17
Economic Viability Study
City of Cardiff Council

        Table 5.1 Average Sales values in South Wales

                                 Detached (4            Semi detached    Terraced           Flat
             Area
                                       bed)                   (3 bed)    (2-3 bed)       (2 bed)

        Wales                     £217,664                 £139,443     £112,236     £122,122
        Cardiff                   £293,161                 £194,048     £164,114     £125,172
        Newport                   £232,683                 £135,389      £97,937       £83,985

5.1.4   In Table 5.1 is a selection of schemes currently, or soon to be, on the market (as of April
        2013). These were sourced from the surveys, from discussions with developers, from local
        newspapers, developer’s websites, and generic websites such as RightMove.

5.1.5   As a guide, open market sales prices per sqm for new homes currently on the market,
        allowing for a reduction between asking price and achieved selling prices, vary from the lowest
        at around £1,700 in St Mellons to £3,900 in Cyncoed and Llanishen.

5.1.6   Values are also affected by the size of the site, reflecting return on capital employed across a
        period of time, the cost of financing a purchase compared with the time taken to receive all
        site sales value.

5.1.7   Sales rates also have a major effect on the overall financing, and most volume housebuilder
        projects seek to achieve around 40-50 open market sales per year (down some 20% from
        2007) in order to justify the land economics upon which the land purchase is based. On larger
        sites (of say 4+ developers), and allowing for affordable housing, this would result in some
        200+ dwellings per annum being completed.

                                                                                                       18
Economic Viability Study
City of Cardiff Council

Table 5.2 New house on market (April 2013)

Cardiff CIL - New Build Property Details (Zoopla & Rightmove April 2013)
                                                                                                                    Gross              Price
                                                                                                                  Internal
Ref No Property
       MarketedName
                by            Address                                    Post code         Type       No. of Beds Floorspa
                                                                                                                     Sqm   Asking Price Price per sqm

                                                                                     Terrace/end of
2       MGY                   Coed y Wenallt, Rhiwbina, Cardiff          CF14 6TN                              3      71.0 £   275,000 £        3,874
                                                                                     terrace?)

                                                                                     Terrace/end of
3       MGY                   Coed y Wenallt, Rhiwbina, Cardiff          CF14 6TN                              3      71.0 £   279,950 £        3,943
                                                                                     terrace?)
4       MGY                   Coed y Wenallt, Rhiwbina, Cardiff          CF14 6TN    Apartment/Coach House     2      47.7 £   179,950 £        3,772
7       Savills               Cardiff Bay, Cardiff                       CF10 5QZ    Apartment (Penthouse)     3     160.7 £   524,995 £        3,267
                              "Lincoln" at Colchester Avenue,
11      Barratt Homes                                                    CF23 9XR    Detached                  4      95.0 £   329,995 £         3,472
                              Penylan, Cardiff
                              "Kingsbridge" at Colchester Avenue,
12      Barratt Homes                                                    CF23 9XR    Detached                  4      83.3 £   306,995 £        3,686
                              Penylan, Cardiff

16      Bellway               Ty Gwyn Gardens, Ty Gwyn Road, Cardiff CF23 5JG        Detached                  4      174 £    775,995 £        4,459

                              The Lodge Vila 1, Apartment 1, Drysgol
17      Edwards & Co.                                                    CF15 8BS    Apartment                 2      117 £    299,950 £        2,563
                              Road, Radyr, Cardiff.
                              The Lodge Vila 1, Apartment 5, Drysgol
18      Edwards & Co.                                                    CF15 8BS    Apartment                 2       95 £    299,950 £        3,153
                              Road, Radyr, Cardiff.
19      Taylor Wimpey         Brython Drive, St. Mellons, Cardiff        CF3 0LR     Detached                  3      66.9 £   204,995 £        3,064
20      MGY                   Usk Grove, Usk Road, Cardiff               CF14 0NN    Apartment                 2      59.6 £   210,000 £        3,521
21      Darlows               Brython Drive, St. Mellons, Cardiff        CF3 0LR     Detached                  3      67.2 £   199,995 £        2,977
                              Roma Victoria Wharf, Cardiff Bay,
22      Edwards & Co.                                                    CF11 0SH    Apartment                 1      34.0 £   108,500 £        3,187
                              Cardiff.

                                                                                     Terrace/end of
23      MGY                   Coed Y Wenallt, Rhiwbina, Cardiff          CF14 6TN                              3      71.0 £   279,950 £        3,943
                                                                                     terrace?)

                              Russell Court, Russell Street, Roath,
24      allen & harris                                                   CF24 3EG    Apartment                 3      55.8 £   125,000 £        2,240
                              Cardiff CF24
                              Russell Court, Russell Street, Roath,
25      allen & harris                                                   CF24 3EG    Apartment                 2      43.1 £   125,000 £        2,901
                              Cardiff CF24
                              Russell Court, Russell Street, Roath,
26      allen & harris                                                   CF24 3EG    Apartment                 1      39.1 £   119,000 £        3,046
                              Cardiff CF24
27      Palmer & Gunn         Rhydes Court, Llanishen, Cardiff           CF14 5NA    Apartment                 2      51.6 £   225,000 £        4,359

                              The Alvingham Special, Parc Llaneurwg,
28      Darlows                                                       CF3 0LR        Detached                  3    67.184 £   199,995 £        2,977
                              Off Brython Drive, St Mellons, Cardiff,

                              Castle Mews, Merthyr Road,
29      Palmer & Gunn                                                    CF15 7LF    Terraced                  3    86.812 £   185,000 £        2,131
                              Tongwynlais
                              Castle Mews, Merthyr Road,
30      Palmer & Gunn                                                    CF15 7LF    Terraced                  2    60.994 £   175,000 £        2,869
                              Tongwynlais
                              The Chepstow at Castle Heights , Caer
31      Leadbitter Homes                                                 CF3 3PW     Semi-detached             3    61.228 £   149,995 £        2,450
                              Castell Place, Rumney, Cardiff
                              The Usk at Castle Heights , Caer Castell
32      Leadbitter Homes                                                 CF3 3PW     Semi-detached             2    50.567 £   128,000 £        2,531
                              Place, Rumney, Cardiff
                              The Raglan at Castle Heights , Caer
33      Leadbitter Homes                                                 CF3 3PW     Semi-detached?            2    41.074 £   115,000 £        2,800
                              Castell Place, Rumney, Cardiff
34      CS Properties         Spencer David Way, St. Mellons             CF3 0QB     Apartment                 2    55.426 £   105,000 £        1,894

5.1.8      In addition to analysing property on the market we have also looked at past sales values, Average Values
                                                                                                      per sq.m
           using Land Registry data. When looking at the markets within Cardiff there are distinctions £in     3,163
           average prices across different postcodes. Table 5.3 below shows average house and flat
           prices between 2009 and 2014 for the main postcode areas in Cardiff.

5.1.9      Importantly, the table also shows the type of developments that have been built in those
           areas. For instance, average prices are lower in city centre locations, such as CF10, and this
           is partly due to the high proportion of flatted developments (91%) built in the city centre.

                                                                                                                                           19
You can also read
NEXT SLIDES ... Cancel