OurCity.London reveals more evidence of how leading surveyors cook the books in order to remove affordable housing from a luxury housing development.
I first wrote about this case three years ago. Frasers property had been granted planning permission to build a quite specularly ugly tower in Vauxhall in 2008. The original planning permission came with an agreement that the developer would provide 40% affordable housing onsite. In 2010 they had successfully lobbied the council to reduce that requirement to 31% and to allow them to build higher and get rid of some of the commercial space, increasing the amount of market housing on the site. In 2013 they returned to the council again, requesting that the affordable housing requirement be got rid of altogether. Their claim was that there proposals were so desperately unprofitable that this was the only way that the scheme would be viable. This time the council only partially accepted their argument and reduced the requirement to 17%.
At the time, it was transparently obvious that the developer was aggressively gaming the system, for reasons that will become obvious below. However, after OurCity.London recently received another confidential viabiltiy assessment, we can reveal how one of the UK’s leading firms of surveyors appear to have deliberately undervalued properties to allow Frasers to get away with building less affordable housing and making more profit.
The Viability of Vauxhall Sky Gardens
The Vauxhall Sky Gardens site is a former data storage facility. Data storage sites are not worth a huge amount of money, particularly when they have been sitting derelict for several years. Even if they are in Central London. The developers of Vauxhall Sky Gardens put in their financial viability appraisal that the site would be worth £850,000 if it was sold in its former use.
In order to be financially viable all a developer needs to do is to build something which will generate enough cash to pay the landowner more than the site is worth in its current use. The logic is that if the developer’s proposals to redevelop the site cannot beat that number then the landowner will not sell them the land. Instead the landowner will sell the land in its current use.
According to documents submitted by the developers to the council, Vauxhall Sky Gardens is not a viable development. In the appraisal submitted to Lambeth Council in 2013, once the costs and the developer’s cut has been deducted from the sales values at VSG the money left over to pay the landowner is £333,000. The appraisal was done on the basis of no affordable housing being provided and was used to justify the argument that the developer couldn’t afford to build any.
Now, how do you build something which will only generate a land value of £333,000 on a site worth £850,000? The developers did not make this clear. In other developments developers have claimed that the developer will lower their profit margin to make up the difference. An act of generosity no doubt.
On the face of it, the proposition being put to Lambeth Council by the developer was absurd. They were being asked to believe that after building a new tower of luxury apartments moments away from Vauxhall Station and the river, the developer will only be left with little more than £300,000 and will have to dig into their profits to make up another few hundred thousand for the landowner.
In reality the situation was even worse than that. We bought the land registry entry for the site where VSG is proposed. It tells us Frasers bought the site in 2007 for £6,470,000 + VAT.
Of course, 2008 was just before the crash. However, the crash appears not to have affected Vauxhall Sky Gardens. In 2012 there were rumours that Frasers were in talks to sell the site to another developer for £20m. In the end the sale appears not to have gone ahead, but Frasers have moved forward with the development and it is now close to completion.
So the developer in both 2010 and 2013 told the Council that they expect that the sales values minus cost will only generate a few hundred thousand pounds – but when they bought the site in 2007 they expected the same calculation to allow them at least 6.5 million + VAT and in 2012 that expectation had risen to at least £20m.
Surveyors and alchemy
So why does a developer pay £6.5m for a piece of land on which it intends to build a building that will leave it a mere £330,000 in cash to cover the cost of that land? It seems to us that there are only two possible options. The first is that Frasers property are the worst property developer on the planet and for some reason have a strong desire to run their company into the ground. The second possibility is that the viability assessment deliberately underestimated the profits of the scheme in order to make the case to the council that they should be allowed to reduce affordable housing.
New evidence uncovered by OurCity.London shows that Savills, the surveying firm employed by Frasers appears to have produced an artificially lower valuation for the Financial Viability Assessment.
In the 2013 viability assessment presented to Lambeth Council it is said that Savills provided the consultant putting together the viability assessment with a pricing schedule of the proposed flats at Vauxhall Sky Gardens. This was for working out the revenues that the scheme would generate from selling apartments. The viability assessment is dated January 2013. It says that flats in the tower will achieve an average sales value of £711 per square foot.
However, later that year Lambeth Council received another confidential viability assessment for the neighbouring site on Wyvil Road. OurCity.London has now reveived a copy of that assessment. That assessment uses a schedule of sales prices for new apartments produced by Savills on the Vauxhall Sky Gardens site as a comparable for their estimates of sales values on their own site. The date of this pricing schedule is December 2013. This gives average sales values of apartments in the tower of between £1,416 and £1,602. More than double the values in VSG viability assessment.
It is the case that most of these values come from the upper floors of the building, but even the apartments on lower floors show sales values significantly above the average given in the Vauxhall Sky Gardens viability assessment. One flat on floor 14 (private residential flats only start on floor 12 as there is office space and affordable housing below) is listed as having a sales value of £1,183 per square foot. The viability assessment for Vauxhall Sky Gardens suggested that these flats would come in at around £580-£600 per square foot.
How much difference does this really make? We estimate about £100m of additional revenues for the developer, based on the published net internal area of the market housing of 126,799 sq ft.
The case also reveals how developers have used the argument that the government has cut housing grant to drop their affordable housing obligations. At the time the developer claimed that the reason why it was having to reduce the amount of affordable housing was the loss of one such grant. Originally the scheme was due to receive grant funding of £5.5m and this was no longer available.
However, if we take £5.5m away from the amount Frasers Property originally paid for the land (6.47m) then still get more than £900,000.
This means that if the developer was expecting at least £6.47m as a residual land value then the development could sustain a loss of £5.5m in grant funding and the development would still be financially viable. If we take into account that the real value of the development was probably at least £100m more than that, then the loss of grant seems even more sustainable. Sure the developer takes a hit on their profits, but they had not been promised the grant when they were given planning permission, and if the development is still viable why should Lambeth subsidise the profits of landowners and developers?
Developers constantly talk about how they take on risks – but they have to accept that risk also means that sometimes they will lose money when they get things wrong.
The large new developments sprouting up all over Central London have been a giant wasted opportunity, and none demonstrate this more so than Vauxhall Sky Gardens. As more and more evidence emerges, we see that the money was there to build far more affordable housing, yet instead we get masses of luxury homes. To make matters worse the Wyvil Road viability assessment states that the majority of the flats at Vauxhall Sky Gardens were being marketed overseas. They contribute nothing to providing the housing londoners need.
Yes, developers have behaved irresponsibly and assisted by consultants they have hoodwinked councils. But that is not an excuse for councils to let themselves be hoodwinked.
Having seen the evidence from another confidential viability report, what is now clear is that at the very least the development at Vauxhall Sky Gardens was undervalued. Within the same year, Savills produced two schedules of sales prices for the same building. One had prices that were double the other, with the lower pricing schedule being used to justify a removal of affordable housing.
Even in the white heat of the 2013 London property market, inflation was not at 100% a year, and it is difficult to understand how that lower calculation by Savills could have been a mistake.
But that should have been obvious to the council and their consultants at the application. It was simply impossible for the developer to generate a land value of at least £6.5m on the basis of the figures given to them; and that is what the developer had to do if they were to make back the money they had already paid for the land. On the basis of publicly available land registry data, it should have been obvious that either the sales values given to the council were grossly underestimated, or the build costs grossly over estimated.
Instead the council consistently accepted the argument of the developer, which was transparently wrong, and London has ended up with another eyesore, a couple of miles from parliament, marketed overseas to a group of investors who will most likely never see the damage they have done to our city.