Viability in the Cost of Living Crisis

S106 Management read with some interest the recent article on Planning Resource: 'Why councils are likely to resist pleas to ease obligations to compensate developers for declining returns, by JoeyGardiner'. 

This article points out quite correctly that due to the current cost of living crisis and spiralling inflation costs are rising considerably, in particular construction due to pay awards and materials increases, and finance, due to Bank of England base rate increases. The construction industry is also heavily energy dependent, and we have yet to see the impact of energy price rises feedthrough into materials costs fully. 

Sales value growth is also stalling, most notably in the capital. While low supply is bolstering sales in the short term, and we consider it unlikely that we will see the sort of fall experienced during 2008-12, the sorts of gains seen over the last few years are certainly due for a correction, particularly when considered against mortgage rate increases.

And finally, outside the wider cost of living crisis, we are beginning to see a quantification of new costs such as biodiversity enhancement and nutrient neutrality feeding into the sector, which will add very considerable costs to many sites.

Recession (again) and viability changes

The article in question draws brief parallels between the current risk of recession and the last financial crisis, and references recent case law and guidance changes regarding viability, which, it suggests, will mean that planners will (or should?) 'view these with some scepticism'.

We agree, the sector has become more professionalised, better regulated and now benefits from a considerable base of guidance and case law including the RICS guidance Assessing Viability in Planning under the NPPF 2019, Parkhurst Road and Holborn Studios among others.

This has had the effect of improving accuracy and methodology, formalising the processes planners can follow for site-specific viability assessment, and ensuring an element of circularity with price paid vs EUV methodology has been discouraged. 

However, as opposed to the suggestion of scepticism which we disagree with, instead these reforms have offered planners more tools to ensure both viability and deliverability are properly taken into account without being abused. Arguably the most important development from our perspective is the increasing use of late review mechanisms to ensure that viability and deliverability are well balanced.

Ideology aside, as viability consultants for over a decade who also operated during the last financial crisis, we have, contrary to the suggestions in the Planning Resource article, noted a recent considerable and familiar increase in the number of successful viability challenges at both initial application and in renegotiations due to rising costs.

So do councils listen to viability arguments?

Contrary to the suggestion made in the Planning Resource article, a majority of councils are very pragmatic about viability. We successfully represent applicants on over 300 developments per year - see our case studies for details.

While policy ambitions will always be defended, and an element of negotiation may ensue even where affordable housing and s106 contribution targets are agreed to be unviable, it is only in very rare cases that a site's viability and deliverability are not taken into account at all as material considerations. It is therefore always important to consider viability in full and raise this with your planning consultant or architect.

This is partly because officers recognise the importance of supporting housing delivery, and partly because adopted policies are generally worded to specifically take into account viability to a greater or lesser degree. To ignore the policy's caveats, as with ignoring officers' recommendations, undermines a decision. While the concerning trend of members ignoring officers' advice at committee can be seen for any number of planning issues where politics intervenes, the ensuing appeals often correct this.

The scale of the current cost crisis is only just now becoming clear, and the current level of inflation is likely to continue for several years without serious intervention. As the Planning Resource article notes, high costs and stagnant or falling values will result in many stalled or mothballed developments. 

However, unlike the conclusions suggested in the Planning Resource article, there are certainly alternatives including properly prepared viability challenges and scheme redesigns to improve efficiency.

How we can help:

S106Management are experienced in viability challenges with a 98% success rate. We can also advise applicants how to improve scheme viability enough to become deliverable - whether through viability submissions, density and tenure redesigns, or renegotiating s106 agreements. If your site is under financial pressure due to increasing costs, call us today to discuss.

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