A scheme’s viability is fundamentally affected by several core factors.
So, what is happening in the market at the moment, and how might that impact viability assessments – and therefore affordable housing contributions – more broadly.
Nationwide’s House Price Index stayed at an annual -5.3% in September, mimicking August. Knight Frank’s October House Price Forecast expects a -7% fall by the end of the year, with a further -4% fall in 2024 before we return to growth in 2025.
The difficulty in viability assessments is the requirement to value as per the available transactional and market data, and with a rapidly decelerating housing market, appropriate adjustments must be made to advertised pricing with consideration given the current market environment and buyer negotiating power. Historical transaction data in the previous year must be treated cautiously as representing a very different seller’s market environment. We are finding that broadly all viability assessors are in agreement that valuations must be adjusted downwards for this trend, particularly where data is less robust.
RICS August Market Update notes a net fall in new buyer enquiries of -25-45%, with further to run.
Finance and Mortgage Rates
While initial positive signs have arisen as the Bank of England held rates at 5.25%, and their commentary suggests that they await a large drop in inflation shortly as the impact of massive energy price increases last year falls out of the annual data, a majority of commentators expect no significant easing of interest rates in the medium term. That said, mortgage providers have slightly reduced rates from their peak, which in turn may stimulate some demand.
This has broad implications not only for demand, as fewer can afford to service debt. This higher risk, higher cost-of-debt environment is impacting viability assessments strongly, with a majority of viability assessors now concurring that a minimum ‘all-in’ rate should be 8-9% rather than historical averages of 6-7%.
Conversely this is having an impact on rental values. Increased finance costs for buy-to-let landlords are feeding through into higher rentals in many areas. Many operators are leaving the market and supply has reduced, further bolstering rental growth to c.10.5% annually (Savills).
Our experience is that the BCIS average data, often used for viability assessment where site-specific costs are unknown, is reliably underestimating costs when compared against site-specific cost estimates by tenderers or quantity surveyors. Broadly while BCIS rates suggest £1800-2000/m2, QS cost plans have been coming in at 10-20% above this level for standard specifications, and considerably higher for bespoke. It is therefore important, as outlined by the RICS guidance, to obtain site-specific assessments to support any viability study for accuracy.
The draft Town & Country Planning (Fees for Applications, etc) (England) Regulations 2023 have been moving quickly through the House’s committees and are expected to take effect very soon after they are made with a 28-day transition period. This will have a significant impact on the cost of applications, with increases of up to 35%. Fees are traditionally included as an ‘all-in’ percentage in viability assessments, somewhere between 8-12% depending on the size and complexity of site; however, this will have to increase to accommodate the new planning fee costs.
In addition, we are aware that a majority of council fees for outsourcing viability reviews have increased dramatically, into the range of £10,000-15,000 for a standard council review and far in excess of the costs of providing a full viability assessment. Particularly on smaller sites, these fees must be accounted for in the viability assessment. We further always advise applicants to ask for several quotes to be provided to ensure best value for money is being obtained.
The Levelling Up and Regeneration Bill has now received Royal Assent and has therefore become the Levelling Up and Regeneration Act. This includes provision to remove the ‘free go’ for all applications, which could have significant cost implications for larger schemes.
The article here highlights the progress on the new Fees Order as well as shows when the different Statutory Provisions are predicted to come into effect. These fee increases have now been confirmed and are to be implemented as of 6th December 2023.
Planning timescales have been increasing UK-wide. Traditionally 3–6-month lead in periods have been assumed; however, this is currently not accurate. We advocate assuming a 12-month lead-in period to any viability assessment.
Further, sales rates have decreased, and presales have reduced compared with the market’s peak. This should be accounted for.
Conclusion: Some initial positive glimmers in relation to inflation, but timescales and costs increase and house prices continue to fall.
Overall, we are seeing a massively increased number of viability enquiries while applicants adapt to changing market conditions.
If you would like to discuss your site’s viability needs, please give us a call today.