What will the developer’s financial considerations be when
negotiating planning obligations?

This question considers the different elements that affect the cost of schemes and how the developer will be considering each and how this is then compared to the potential value of a scheme. It is aimed to help you to understand things from a developer’s point of view to assist when you are considering schemes and negotiating.

Introduction

In negotiating with developers to reach an agreement on the affordable housing requirement, it is important to understand the overall scope of project costs and values, and the factors that will influence them.

Project Costs

In terms of project costs, the following will need to be considered:

Project Values

In terms of project values, the following will be considered:

The above factors all influence the level of return to the developer, who will need to not only create a product for which there is market demand, but also importantly meet shareholder expectations in terms of profit, return on capital expended, and an adequate margin. If these requirements cannot be met then the developer may not be able to pass their own internal approval process and a proposal will either not proceed, need to be amended, or the scope of costs reduced potentially through an injection of public finance/grant.

The developer is likely to have developed in-house appraisal tools to reflect their internal accounting processes, and the exercise is often undertaken by a team combining property agents and valuers together with quantity surveyors and cost consultants appointed by the developer. For large scale developments it is important to draw in wider experience as the valuation and cost analysis will require broader market knowledge than that which may be available locally.

A further consideration with large scale sites is that development costs and values will not be realised at a single point in time. For example, the developer may need to fund infrastructure costs and pay for the land up front before making any profit through sales. It is common, therefore in large scale scheme appraisal that a discounted cash flow approach is taken to reflect the current value of the project by discounting all future costs and income back to today’s values. This is referred to as the 'Net Present Value'.

Alternative development scenarios can be considered through the financial modelling process. This involves what is variously known as ‘sensitivity testing’ or ‘pressure testing’ and involves variations in key cost and value assumptions, such as sales rate and/or values and build cost inflation.

Developer attitudes to providing affordable housing as part of mixed tenure developments beyond simply financial and viability considerations is not covered here but an interesting and useful study has been done by Joseph Rowntree Foundation: Developer and purchaser attitudes to new build mixed tenure housing (March 2006). Web link >>

See Urban Splash Best Practice- A developer’s perspective: bringing a positive attitude to affordable housing provision

Their website is www.urbansplash.co.uk

What will the developer’s financial considerations be when negotiating planning obligations?

Introduction

Project Costs

Project Values

What will the developer’s financial considerations be when
negotiating planning obligations?