Financial viability assessments play an important role in determining whether residential developments are commercially deliverable and what contributions they can reasonably make towards affordable housing and local infrastructure.
From changing construction costs and finance rates to affordable housing requirements and site-specific challenges, numerous factors can affect whether a proposed residential scheme is financially viable.
A robust financial viability assessment can help developers, landowners and local planning authorities understand the economics of a development, test different scenarios and make informed decisions about how a site can be brought forward.
In this guide to residential development viability in England, Gary Jeffries, Head of Residential Property at Vail Williams, explains what a financial viability assessment is, when one may be needed and the principal assumptions that determine its outcome.
What is a financial viability assessment?
A financial viability assessment, sometimes known as a development viability assessment or viability appraisal, examines whether a proposed development is capable of generating a sufficient financial return to be delivered.
It compares the value generated by a development with the costs of delivering it, planning policy requirements, an appropriate developer return and the benchmark land value against which the scheme is tested. Typical costs include:
- Construction
- Professional fees
- Finance
- Marketing and sales
- Planning obligations
- Contingency allowances
If the value generated is insufficient to meet development costs and policy requirements while providing appropriate returns to the developer and landowner, the scheme may not be viable in its proposed form.
However, viability assessments are rarely as straightforward as a single calculation. The result depends on the evidence supporting each input, the timing of income and expenditure, the characteristics of the site and the assumptions made about future market conditions.
Why is viability important in the planning process?
Planning policies commonly require residential developments to provide affordable housing and contribute towards the infrastructure and services needed to support new development.
These requirements should be established through the local plan-making process and tested to ensure they do not prevent development from coming forward.
However, there can be circumstances where a proposed scheme can’t provide the full level of affordable housing or other contributions required by policy.
The National Planning Policy Framework states that where up-to-date policies set out, expected contributions, policy-compliant applications should be assumed viable. The applicant must demonstrate the particular circumstances that justify an assessment at application stage.
The assessment can then help establish what level of affordable housing and other policy contributions the development can viably support.
Importantly, the assessment has to be supported by clear evidence. It should explain its inputs and assumptions, identify any differences from the evidence underpinning the relevant planning policies and follow the standardised approach set out in national planning guidance.
A well-prepared assessment helps the applicant and planning authority understand the evidence behind any proposed departure from policy and work towards a deliverable outcome.
A specific restriction applies to development subject to the Green Belt Golden Rules. A site-specific viability assessment should not be used to reduce the required developer contributions, including affordable housing.
When might a financial viability assessment be needed?
An assessment may be appropriate where site-specific or market circumstances mean a development cannot viably meet the requirements set out in planning policy.
Examples might include:
- Exceptional demolition, remediation or infrastructure costs
- Challenging ground conditions or contamination
- Significant changes in construction or finance costs
- Lower-than-anticipated residential sales values
- Heritage, flood-risk or environmental constraints
- High utility or power-connection costs
- A significant change in economic circumstances
- A change to the form, density or tenure of a proposed scheme
- The redevelopment of a complex brownfield site
Viability assessments can also be useful outside the formal planning process.
For example, public sector landowners may need it to assess the deliverability of development proposals or the relationship between land value and wider policy objectives.
How is residential development viability assessed?
For a conventional residential development, the usual starting point is a residual development appraisal.
This starts with the gross development value of the completed scheme and deducts the estimated costs of delivering it, including an appropriate developer return. The amount remaining is the scheme’s residual land value.
Gross development value – total development costs – developer return = residual land value
The residual land value is then compared with an appropriate benchmark land value.
If the residual land value equals or exceeds the benchmark land value, the scheme may be considered viable on the assumptions adopted. If it falls below the benchmark, this can indicate that the development is not viable in its current form.
The calculation itself may appear relatively simple. In practice, however, small variations in sales values, build costs, finance rates, delivery timescales or other inputs can materially change the result.
This makes robust evidence, professional judgement and sensitivity analysis essential.
