by Jen Lemen
Hot Topic Highlight - Financial Viability Assessments
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What is this week's blog about?
This week, we will be looking at the new RICS Professional Statement Financial viability in planning: conduct and reporting (1st Ed, May 2019).
Essential reading for RICS APC and AssocRICS candidates on a range of pathways, including Planning and Development.
You can also listen to the audio version of our blog at Anchor.
When is the new Professional Statement effective from?
1 September 2019.
Is it mandatory?
As a professional statement, it is of mandatory application.
What are the aims of the new Professional Statement?
It aims to provide consistency in the application of policy and guidance and to assist practitioners in individual cases. The Professional Statement primarily focusses on reporting and process requirements - a 2nd Edition will be published by RICS in the near future to focus on development viability.
What changes have been made?
The new Professional Statement reflects the changes to NPPF 2 (revised in July 2018 and February 2019), PPG (revised in May 2019) and case of Parkhurst Road Ltd v Secretary of State for Communities and Local Government (2018), which concluded that professionals should contribute to more efficient public administration in planning.
In England, the plan-led system means that planning applications are decided in accordance with the adopted development plan, unless other material considerations indicate otherwise, e.g. NPPF 2. Furthermore, the revised PPG states that all viability assessments, including any undertaken at the plan-making stage, should reflect the recommended approach in NPPF 2.
What is a Financial Viability Appraisal?
Also known as an FAV, this is the process of assessing whether a site is financially viable, by looking at whether the value generated by a development is more than the cost of developing it. Typically, this is calculated using a Residual Land Value approach.
Viability helps to strike a balance between the aspirations of developers and landowners, in terms of returns against risk, and the aims of the planning system to secure maximum benefits in the public interest through the granting of planning permission.
Who might submit a FVA?
- Reviewer (on behalf of LPA or themselves)
- Area-wide viability assessment and representations made in respect of an an area-wide viability evidence base before and during a public examination
- Assessment part of proof of evidence or an expert’s report before or during an appeal or High Court case
What are the requirements of the new Professional Statement?
- Reports must include a statement that the surveyor has acted objectively, impartially, without interference and with reference to all supporting information
- Surveyors must comply with PS2 of RICS Valuation - Global Standards (Red Book)
- Terms of Engagement must comply with PS1 of the Red Book, with an additional disclosure that no conflict or risk of a conflict of interest exists, although conflicts can be managed with informed consent
- Surveyors must declare where they have previously advised on a planning application or provided ongoing advice to help formulate planning policy
- No contingent fees permitted
- Reports must be based on market-based rather than client-specific information
- Reports will be made publicly available, although some confidential information may be withheld, e.g. current or future land assembly negotiations or specific business information
- All reports must contain a sensitivity analysis and explanation of risk and return (as part of ‘stand back’ approach to apply a viability judgement to the report)
- A non-technical summary must be included to allow non-specialists to interpret the results
What is the basis of value in a FAV?
Benchmark Land Value (BLV) is used as the basis of value in a FAV, which is defined in the latest PPG. It is based on Existing Use Value (EUV), plus a premium for the landowner. This is also known as EUV+ or the EUV plus approach.
Existing Use Value (EUV) is not the definition set out in the UK National Supplement to the Red Book in VPGA 6.1, which relates instead to financial reporting. It is a different definition required under Government policy, which does not need to be formally declared as a departure to the Red Book providing that the valuation purpose, financial viability in planning, is made clear in the surveyor's report.
Furthermore, EUV is effectively the value of land in it's existing use. This is not the same as the price paid and it must disregard any hope value.
The premium for the landowner should reflect the minimum return at which it is considered a reasonable landowner would be willing to sell their land, i.e. the amount above EUV that goes to the landowner. This should provide a reasonable incentive for a land owner to bring forward land for development, while allowing a sufficient contribution to fully comply with policy requirements.
Alternative Use Value (AUV) can be considered, which is the value of the land for uses other than the existing use. If it is used to assess BLV, however, then it should be limited to those uses which fully comply with up to date development plan policies. If it is assumed that the existing use will be refurbished or redeveloped, then this will be considered as an AUV.
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Stay tuned for our next blog post to help build a better you
N.b. nothing in this article constitutes legal or financial advice.