OurCity.London has received another confidential viability assessment. The assessment is part of an application to build another skyscraper at 12-20 Wyvil Road in Vauxhall. In this post we reveal how the developers and landowners gamed the viability system to justify a reduction in affordable housing on the site.

12-20 Wyvil Road

The plans for a new skyscraper at 12-20 Wyvil Road were granted planning permission in November 2014. The plans are to build 219 flats and office space in a 37 story tower and a smaller building attached to it. The development is part of the Vauxhall and 9 Elms ‘Opportunity Area’. The owners of the site at the time of the original planning permission were two companies: Wyvil Road Limited and Network Rail.

As with all of the developments in the area, planners reduced the amount of affordable housing that the developer is obliged to provide on the basis that the development would be ‘unviable’ if it contained 40% affordable housing, the amount required under planning policy.

In fact the developer claimed that the viability situation was so bad that even if the development included no affordable housing whatsoever then the tower of 100% luxury housing would still not hit the financial viability benchmark.

Luckily, the developer rode to the rescue and offered to cut the ‘normal’ 23% profit level to allow some affordable housing to be built as a favour. The viability assessment said:

We would highlight that the provision of these units and hence the acceptance of a lower profit is on an “ex gratia” basis and in such a scenario is personal concession by the Applicant with respect to ‘normal’ profit levels and is against the conclusions of the viability analysis.

For those not too hot on their dead languages, ‘ex-gratia’ is Latin for ‘favour’. Perhaps even Savills (the developer’s viability consultants) thought that it would simply be too crass to put that in English.

The Land

In this case, the argument is all about land values. The developer, and Savills, argued that the new building would not generate enough cash to to be able to pay a target benchmark land value.

Usually the benchmark land value in a viability assessment is the land in its existing use. The logic is that if a landowner can get more money from selling the land to be developed than if they sold the land in its existing use, then they will sell it to a developer.

On that basis the argument of the developer may seem rather strange. Currently the 12-20 Wyvil Road site comprises of a small 1950s office building (the building featured at the top of the post) and an old hall used as a roller disco. The development proposed is a tower which includes 219 apartments and office space. It is difficult to image how land used for high end luxury housing could be worth less than land used for a clapped out low rise office building, but that is the case that the developer was making.

Changing your values

A closer look at the viability benchmark number contained in the viability assessment quickly shows us how Savills managed to make this development appear as a financial disaster. The trick is in the benchmark chosen.

The number used as a benchmark for the test in this case was not the existing use value, but what the developers claimed was the “market value” of the site, or £30m, which was obviously much more than the current value of the buildings on the site.

The use of market value as a benchmark has some support from the Royal Institute of Chartered Surveyors (RICS), although the practice is highly controversial. The fear is that if market value is used as a benchmark, developers can overpay for the land and then the council will be compelled to drop planning obligations to help them make up the deficit.

For this reason RICS says that where market value is used the value should take into account the cost of meeting all planning obligations.

That was exactly what did not happen in this case. Instead of working out what an appropriate land cost would be that priced in the need to build affordable housing, they looked at real market transactions and used those values as a benchmark. The problem was that all of the sites they used did not meet the council’s planning obligations, particularly in relation to affordable housing.

In the examples they used, the extra money the development could generate from dropping affordable housing was priced into the land.

In effect, what the developer was telling the council was that in order to be financially viable, the development had to outperform other developments in the area that had already been allowed to drop their affordable housing obligations. With this benchmark, achieving a development with a full complement of affordable housing would be impossible. The developer set themselves an impossible task, failed and then asked the council to help them at our expense.

Profits

The use of the market value gave the developer and land owner a huge advantage in their negotiations. It was also very profitable. On our calculations if the council had insisted on doing the viability assessment on the basis of an existing use value the benchmark figure would have been around £2.7m, rather than the £30m they used. That means that in all likelihood the council could have insisted on much more affordable housing, and a lower profit for the landowners and developers. We can estimate this by using other confidential documents in our possession relating to the neighbouring site, Vauxhall Sky Gardens, where the existing use value was just £900,000.

The Vauxhall Sky Gardens (VSG) site had similar industrial buildings on it, it is also just one third of the size of the 12-20 Wyvil Road site. If we take the existing use value of the VSG site and multiply by three we get a ballpark figure of £2.7m. That is, less than ten times the benchmark used on the 12-20 Wyvil Road application.

Why did the developer and land owner use such a vastly inflated land value? Perhaps it could be because that is what was eventually paid for the land. In 2015, with the benefit of planning permission, the landowners sold the land to Grand South Ltd, a company registered in Jersey for £30m. And although the land transaction happened after planning permission was granted, it is common practice in the development industry to agree a price before planning and then execute the transaction after it has been secured, to make sure that the increase in value from the change of use is secured by the landowner.

If that did happen this is exactly the situation planning authorities and RICS tried to avoid. A developer agrees to pay a high price for land on the basis of profits that can be achieved if a development with little or no affordable housing is built.

The developer then uses that land value to justify not building affordable housing to the planning authority. In effect the public loses because a landowner, in this case Network Rail, decided to get greedy.

RICS have been appraised of this case, whether they will do anything is another matter altogether.

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The “Market Values”

Below are the market values used as comparables for the viability appraisal for 12-20 Wyvil Road. It should have been obvious from the benchmarks chosen that building a policy compliant development in terms of affordable housing would have been impossible.

In order to generate comparable figures using the plots chosen Savills took the price transacted, applied inflation and then multiplied the price to make up for any difference in size of the plots of land. In some cases a discount was applied if the development was sold after planning permission had been granted.

Parliament House is a tower of luxury housing behind the Albert Embankment which was granted planning permission in 2008 for a 23 story tower containing 31% affordable housing, all to be sold on a shared ownership basis. Planning policy requires 40% affordable housing with 70% being at social rent.

There is a similar story at Hampton House, currently being built and renamed “The Corniche”. Here the proposal was to build 33% affordable housing as ‘senior living’ accommodation.

Vauxhall Sky Gardens, another comparable on the list, had a land value of £10.9m. As we wrote in our last blog, the proposals in this case was for a building with just 17% affordable housing.