The planning system needs to take viability more seriously

There is no point in a local plan that isn’t deliverable.

The viability of residential development, long taken for granted, is becoming increasingly challenged – and that puts the deliverability of plans at risk. Construction costs are some 38% higher than in January 2019 – an increase that has not been off-set by commensurate increases in house prices.

Zoopla reports that residential development is now unviable in 48% of England. The picture in some regions is even worse – Zoopla’s data shows that just 13% of the Midlands has selling prices at a level where it makes financial sense to build new homes.

This viability pressure impacts future sites more than current ones. On sites bought in the past, cost increases result in lower profit margins. Over the last five years, England’s biggest home builders have seen their profits fall despite revenues increasing. Last year, amongst the five biggest builders only Persimmon reported a double-digit operating margin – and at 11.5%, that was still roughly half the level of a decade ago.

Margins that low simply aren’t sustainable so higher costs will be reflected in future land purchases.

Those cost increases have already resulted in lower land values. Historically, land values closely tracked house prices, but today land is worth roughly the same as in 2021 despite house prices being 25% higher. Since 2007, house prices have risen by 50%, while land values have fallen by 20%.

Land values have essentially reached the point below which they cannot fall. Landowners are rarely forced sellers. If the price offered fails to meet their expectations, they will simply keep it in its current use or sell it for a different use that delivers a higher value. 

England’s biggest home builders have seen their profits fall despite revenues increasing 

Rob Perrins, the executive chair of Berkley Group, has pointed out that their main competitor for land in London is self-storage operator Big Yellow. If landowners won’t sell, then the number of development sites coming forward – and the number of homes built - will fall.

Build cost increases haven’t just been driven by inflation in the wider economy, although that has undoubtedly played a significant role. Regulatory and policy burdens have had a big impact too. We’re all familiar with those changes: nutrient neutrality, water neutrality, biodiversity net gain and more.

Yet upcoming regulatory changes - such as the Future Homes Standard, Building Safety Levy and a doubling of landfill tax - will push construction costs higher still. The Housing Forum estimate those new regulations will add £9,700 to the cost of a new home.

Section 106 costs have also become more onerous. Although contributions are supposed to be limited to just those improvements necessary to mitigate the impact of the development, the section 106 process has increasingly been seen as a blank cheque, with the cash-starved public sector asking for contributions for ever more tenuous purposes.

Contributions are sought for unspecified “public realm improvements” and police forces ask for money for new pens and laptops.

We’ve moved from a system of “take what we need” to one of “take what we can.”

Landowners and developers have put up with it because the costs of each extra contribution are usually less than the cost of the planning appeal needed to challenge it - especially when time delays are factored in too. For years, rising house prices and lower build costs allowed those requests to be absorbed. But that is no longer the case.

While each of these policies and regulations is reasonable and justifiable in isolation, when combined they have a material impact on development viability.

Although viability has always supposed to have been an important part of the plan-making process, it hasn’t been an area of focus, with a tendency to assume house price increases will solve any problems. If plans are to deliver, they must take commercial realities into account – which requires viability to be considered by local authorities from the outset in the way national planning policy expects, and far more carefully than has been the case in the past.

Matthew Pennycook, the planning minister, recently wrote to the Planning Inspectorate clarifying how viability should be dealt with when examining local plans. He explained that iInspectors should carefully consider whether identified deliverability and viability issues are of such significance that they genuinely undermine the soundness of the plan, or whether they represent matters that could reasonably be expected to evolve over time as market conditions change. In doing so, inspectors should distinguish between uncertainty arising from prevailing market conditions and evidence indicating a fundamental obstacle to delivery.” 

The viability pressures we are currently witnessing are due to entrenched, structural changes to development viability resulting from the rampant build cost inflation of the last five years combined with recent and upcoming regulatory and policy changes 

Self-evidently, plans which are supposed to manage development for fifteen years shouldn’t be based on temporary conditions at the time they are prepared. But the viability pressures we are currently witnessing are due to entrenched, structural changes to development viability resulting from the rampant build cost inflation of the last five years combined with recent and upcoming regulatory and policy changes. They are not issues of short-term volatility.

When land values have bottomed out, short of appropriating land there are few ways that development viability can be improved. House prices can increase faster than build costs – the exact opposite of what government housing policy is intended to achieve. Build costs can be reduced – which means deciding which policy objectives and regulatory burdens can be removed. Or the government can subsidise development from the already strained public purse. Pick one.

Yet Pennycook’s letter risks giving inspectors a reason to duck difficult conversations about viability in the hope that conditions will improve. And without policy changes, that means hoping house prices become even less affordable.

Without confronting that hard reality, Plans won’t deliver. After all, a plan that isn’t viable is just a wish.

 Paul Smith is managing director at The Strategic Land Group