The use of Financial Viability Assessments by developers has become one of the most controversial issues in the debate on housing and planning. This article explains how financial viability in planning works, and how the system isn’t working for the public.
Why financial viability in planning matters
When planning authorities decide on whether or not a development should be granted permission to build they must by law take into consideration the needs of the local area as set out in the development plan, drawn up by the local planning authority.
The planning documents that make up the development plan contain a whole host of requirements on developers, from how land should be used (i.e. should it be employment space or housing), to protecting the views and settings of historic buildings, right down to design considerations such as the size of balconies. Of course an important planning consideration is the provision of affordable housing in new developments.
This system is designed to ensure a democratic accountability towards the local built environment. The requirements of the plan are designed in consultation with the public and their purpose is to make sure that new developments are of a high quality, do not damage our environment, and respond to the needs and desires of the local community.
However, over a number of years a succession of governments have created a significant and growing loophole in the planning system, the need for planning authorities to have regard to the financial viability of developments.
Under the current planning rules if a developer can show that their proposals are not financially viable, the obligation is on a local authority to remove planning conditions.
In other words, if a developer is not achieving an agreed level of profit then the planning authority must subsidise their profits by allowing them to depart from the development plan. This is primarily achieved through the provision of fewer units of affordable housing, but it can also mean not providing adequate open spaces, childrens’ play spaces, community facilities or other planning obligations. Or to put it bluntly developers profit comes first, town planning second.
How financial viability in planning works
The key to the system is the financial viability assessment (FVA), a tool for working out how much money a development will generate and how profitable it will be for the developer and land owner. An FVA sets out the revenues a development is expected to make and the cost of building it.
In order for the development to be viable, the money left over after the costs have been subtracted from the revenues must be enough to hit two numbers or viability benchmarks:
- Enough profit for the developer to attract investors to finance the project
- Enough money to persuade the land owner to part with their land
If a site can not achieve these benchmarks it is deemed to be financially unviable and the developer can ask the council to lower planning obligations (build less affordable housing, make fewer contributions to the community) in order to make a development viable.
How financial viability can be manipulated
Obviously the values in a FVA are highly subjective, and what is ‘enough’ profit is a contentious issue. If a planning authority allows these benchmarks to be set too high then that means means less money for the community and fatter developers and land owners.
Large amounts of money are at stake. Most planning authorities in London require new housing developments to contain between 40-50% affordable housing. If a developer can persuade the council to drop that requirement it means they can build many more luxury homes to sell offshore.
This is where unscrupulous surveyors can undermine the planning system. By setting unrealistic viability benchmarks, by wilfully overestimating the cost of development or underestimating the revenues, surveyors can make a development look much more unviable than it really is. And if they get away it their clients can make huge profits at the expense of the public.
These kinds of games are aided and abetted by secrecy that has developed around the financial viability system. In all cases developers claim that the information they put into an FVA reveals commercially sensitive data and therefore must be kept confidential.
As a result, it has become standard practice of planning authorities to keep all information surrounding the FVA secret, even from councillors on the planning committee. In essence this means that the planning system has been outsourced to banks and surveyors.
The secrecy of the system, and the inability of the public and decision makers to scrutinise viability assessments frequently means developers can get away with murder, as a number of case studies on this website will attest to.
Who regulates the system?
That is not to say that FVAs are completely unregulated. It is standard practice for planning authorities to hire their own consultants to check the figures of developers. But that is not without its own problems as can be seen in this post.
In addition surveyors are supposed to be regulated by RICS, which has a public interest mandate to ensure their members behave with integrity. We have yet to see whether that system of regulation can be effective.
But the facts speak for themselves. There is something very badly wrong with the system. Almost every development application in London comes with an FVA claiming that the development proposal is unviable, whilst back in the real world those same developers continue to make huge, record breaking profits.
The tragedy is that as a result Londoners have been compelled to give up so much, on the basis of some highly questionable figures.
This website contains a number of case studies demonstrating where this process has gone wrong. Below are some links to the most recent articles on this subject.