Considering a development proposal?
Quite often, as general practice surveyors, we are asked to appraise a development proposal, we have to work out the end value of a finished building, which will include provision of services, landscaping, even costing down to the light fittings and kitchen and bathroom fixtures and fittings. We then have to work the cost of construction to supply the finished article. This costing will also include a finance cost; that is the cost of the overdraft used to finance the development. At the end one can take the proposed end value of the building, deduct the cost of construction, deduct the cost of the development land, and hopefully leave a builders or developers profit. Quite often the developer will not be the builder as they are sometimes regarded as being separate processes. In surveying terms, this type of appraisal is known as a residual valuation.
These days, when preparing a residual valuation, we as surveyors have to take into account additional costs which must be added in. They are the contributions required by planning authorities for the provision of public services. They might be a contribution to highways, provision of schools in the area, or an archaeological dig to see if there are ancient remains of a past civilisation present on the site. These liabilities will be encompassed in either a section 106 agreement, which is a legally binding document entered into by the land owner and the local council, or a community infrastructure levy. Both are contributions to fund public services which are deemed to be required to ensure long term viability of the development.
If the development is large enough, normally any scheme which involves more than 10 houses, it will also include the provision of social housing, which in effect is housing made available at a reduced price to provide affordable housing. Quite often there is an unbridgeable gap between perceptions of viability held by the planning authority and what developments are actually capable of supporting financially, given the planning obligations and policy requirements. Both sides therefore need to have an understanding of each others requirements so that there is a consistency of process when planning applications are made.
Development these days is not a cheap process. Even pre application advice from the local planning authority costs money. On a small householder scheme, this can be £300. For that you will receive a consultation from a planning officer, a site visit, and then a letter stating their recommendations and requirements if the application is to have a good chance of success in gaining the appropriate approval notice. Then building drawings have to be prepared. Costs for this will vary significantly depending on whether you use an architect or an architectural technician.
A set of drawings for a simple four bed roomed house will cost anywhere between £1,000 and £4,000 depending on the complexity of design and the number of drawings required. Then you have a planning fee, and a further fee for obtaining building regulations, to ensure that the proposed development complies with the latest requirements and regulations pertaining to building control. It is essential to ensure that the building is checked by the building inspectors throughout the life of the project, in order to obtain a completion certificate. This will assist with obtaining any completion guarantee such as NHBC, and with increase the saleability or mortgagability of the property when it is placed on the market.
Once all these obligations have been complied with, you the developer will be free to make a start. One of the next big cost centres is the provision of services. For a small three terrace house development, quotations we obtained exceeded £20,000. There will also be a legal process which needs to be completed, namely the obtaining of the appropriate way leaves to allow access from the highway to your development site. Hopefully these will be relatively simple to obtain, but one is never certain until the ink is dry on the document. By this stage, the developer should have a clear run home, sin that once the building is out of the ground, that is foundations built, the rest of the building process can be costed very accurately.
Most development appraisals will contain provision for unexpected costs, this might be as much as 10% of the final build cost, and is known as a contingency fund. When you are watching the foundations being dug, and the JCB hits running water, or sand, and the building inspector scratches his head, sucks breath in sharply and says “ Well my friend, I think your foundations will have to go down to three metres to get a stable base” one draws heavily on the contingency fund to pay for the additional construction costs. Hopefully 10% will be adequate, if not then there will be a further erosion of the developers profit, because that is the only variable cost left to alter.
In order to try and provide continuity and consistency in the planning process when dealing with public sector contributions, the Royal Institution of Chartered Surveyors (RICS) have this month published a new guidance note called “Financial viability in planning”. The aim of the guidance note is to provide all parties concerned with the planning system with definitive and objective guidance on evaluating the impact of planning obligations, including affordable housing, other section 106 requirements and planning policy requirements on the financial viability of a project.
Hopefully if both developers and planning officers refer to the same guidelines there will be more consistency in determining what a particular development can afford whilst maintaining developer viability. It is published at the end of this month, and should be available from the RICS. I am sure it will be a readable and useable document for both developer and planner alike, and may lead to greater efficiencies within the operating planning system, as each submitted application will have more chance of obtaining that precious approval notice. If you are involved with the planning system, look out for it at the end of the month.
This blog was written by Tony Rowland, The Property Doctor, of Timothy Lea and Griffiths Ltd.
