New HCA Viability Tool
||27 April 2011
Just before everyone broke-up for Easter the HCA published their new site specific Development Appraisal Tool ("DAT"). This supersedes and replaces the EAT model and incorporates the new Affordable Rent tenure and other changes in affordable housing provision being introduced throughout the 2011-2014 spending review period including the HCA's 2011-2015 Affordable Homes Framework Programme.
The DAT is intended for the appraisal of small and medium size schemes and can be used in two ways: firstly, as a 'gap funding' tool which enables land value and developers profit to be treated as inputs with the deficit or surplus arising from the scheme as an output (thus enabling potential grant requirement to be identified); and secondly, as with the EAT model, it can be used to calculate the residual land value as an output.
The DAT initially appears to offer a number of benefits over the EAT such as it now allows users to input:-
- all forms of affordable housing
- private rent
- market rent
- market sale
- development period of up to ten years across a maximum of five phases
- land acquisition costs
- developers profit levels
However, it is also apparent that the DAT is based on assumptions which will disadvantage the development industry particularly insofar that the DAT treats any Registered Provider ("RP") revenue over and above the DAT calculated revenue as cross subsidy - effectively capping the price payable by the RP.
Furthermore, whilst the model no longer incorporates default values for numerous inputs (which will no doubt cause considerable debate throughout any negotiation) the accompanying User Manual blithely assumes that there is no need to allow for a construction cost contingency sum on a volume greenfield development and deems all land holding costs incurred prior to the commencement of development as irrelevant when calculating an IRR. Worryingly the DAT doesn’t regard the provision of affordable housing as involving any sales risk for the developer and “expects” only a contract type profit based on costs whereas the EAT incorporated a suggested default of 6% of sales value.
On the whole the DAT appears to be a marginally improved version of what was, and still is, a flawed appraisal methodology that continues to place undue weight on proclamations from a quango which has very limited status when interpreting Policy or Guidance.
To that extent, whilst the User Manual stresses that the role of the HCA does not extend beyond that of ‘critical friend’ and that they will not provide evidence to an Inquiry nor act as a final decision maker, it remains to be seen if local planning authorities will accept that the onus is on them to set targets which take account of the risks to delivery and only to use models such as the DAT to consider the balance between planning obligations, affordable housing provision and site specific scheme viability after they’ve proven their Policy requirements will not have a negative impact on overall levels of housing delivery and the ‘growth agenda’ of the Coalition Government.
Pioneer is the leading independent consultancy specialising in housing market analysis and the provision of housing. Our professional consultants are expert in undertaking full viability appraisals to establish the percentage, mix and tenure of affordable housing on new and stalled projects through the use of the DAT, the GLA (Three Dragons) Toolkit, bespoke and scheme specific viability modelling and subsequent viability negotiations with local planning authorities.
If you would like to discuss this further or have a specific project where viability is an issue please contact us.