Financial viability for housing-led projects
A beginner's guide on assessing whether a proposed housing project is financially viable.
Applies to England
What is ‘viability’?
Assessing the financial viability is crucial in deciding whether the project should proceed.
A project is viable if the value (revenue) generated exceeds the development costs with an allowance for profit.
How to assess viability
Different methods can be employed to assess development viability. These methods are known as development appraisals.
Development appraisals are a residual method of valuation, which is a valuation/appraisal based on a deduction of development costs from the anticipated proceeds. The residual (what’s left) is usually either development profit or land value.
This method of valuation is appropriate for development land and refurbishment opportunities.
The residual valuation method can be complicated because development takes time, but the valuation is carried out at a single point in time.
Because of this, 2 different applications of the ‘residual valuation method’ have been developed:
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discounted cash flow (for more complex developments)
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basic application of the residual method
This guidance covers the basic residual method.
The basic residual method
This type of valuation might be used for less complex sites or early in the development/feasibility stages to consider optimum development.
This approach recognises that the value of a development scheme is a function of several elements.
Gross development value (GDV)
This is the total income from the scheme, including private sales, affordable housing, and any commercial space’s investment value (less purchaser’s costs).
Total development costs (TDC)
This is a combination of all the costs that the developer will incur relating to this scheme, such as:
- base build costs (construction materials)
- abnormal build costs (extra over foundations)
- contamination remediation
- the cost of infrastructure (roads, paths, utility upgrades, public open space)
- professional fees (both pre and post-planning)
- s.106 and CIL
- marketing and finance
Developer profit
This is typically applied as a percentage of GDV for residential schemes.
Residual land value
The residual land value is derived from the value of the completed development (net) minus the development costs, including the developer’s profit.
If costs exceed GDV, there is no land value, and the scheme is unviable. Typically, the residual method of valuation is used in 2 ways.
To calculate residual profit/value.
GDV minus total costs (including the price paid for land) = residual profit/value.
Typically used when the land has already been purchased
To calculate residual land value.
GDV minus total development costs (including profit) = residual land value (the amount the developer can afford to pay for land for the project to be viable).
Typically used when the land has not been purchased.
Development appraisal assumptions
The development appraisal is only ever as robust as the inputs provided.
Therefore, it is essential to understand the assumptions and inputs in the appraisal, whichever tool is used.
There is a need to agree on the inputs that will be used for each of the elements of the viability equation as applicable: gross development value, build costs, other costs, including finance, land costs and profit.
Appraisal assumptions checklist
- Revenue: expected income from development (sales of housing and commercial property)
- Grant: where applicable
- Preliminaries: set up and site management costs incurred by the developer/contractor; often included within Build - - Costs: (e.g. in BCIS data)
- Site preparation: work to prepare the site for development e.g. demolition, removal of vegetation, levelling of land
- Build costs: the cost of building individual houses, blocks of flats or commercial units
- Enhanced design standards or policy-related costs: e.g. additional cost allowances required to meet enhanced design requirements such as the use of specific non-standard materials
- On-plot external works: works directly linked to individual homes on top of the basic build cost e.g. gardens, driveways, a proportionate share of the estate road adjoining the property and connections to utilities etc.
- Strategic infrastructure: larger-scale infrastructure serve the whole site rather than individual homes e.g. spine roads, landscaping and drainage systems
- Abnormal costs: any cost that would not routinely be expected on a typical development site e.g. ground remediation, flood risk protection, utilities upgrades, offsite infrastructure works (e.g a road widening scheme elsewhere in the local area)
- Contingency: usually a percentage allowance to reflect the fact that the majority of costs and other assumptions are estimates and subject to change
- Community Infrastructure Levy (CIL): where adopted as part of local planning policy
- Section 106 and Section 278 costs: also known as development contributions, payments agreed for facilities/infrastructure deemed necessary in order to make the development acceptable e.g. education, healthcare, sports, community facilities. Section 278 relates specifically to highways works such as junction improvements or crossings.
- Sales and marketing costs: sales agent, advertising, solicitor fees incurred in selling individual homes
- Build and sales rates: the number of homes that are built and sold each month or year; this will determine the overall duration of the development
- Finance costs: it is usual to assume that all of the money needed to fund development is borrowed (debt finance) and interest charge, therefore, needs to be made on outstanding debt during the course of development
- Developer profit: the level of profit needed by a developer to reward them for the risks taken in terms, costs, sales values achieved and time taken to do so; usually expressed a percentage on GDV or TDC
Appraisal tools
Development appraisals can be undertaken using commonly available spreadsheet software or one of a number of specialist appraisal products. These tools include the Excel-based Homes England Development appraisal tool, as well as various commercially available products.
‘Off the shelf’ appraisal tools provide a “secure” framework that can be used to quickly analyse multiple developments or development scenarios in a consistent manner. The tools usually include the ability to easily run sensitivity analyses to explore the effect of changes in key variables on viability.
Benchmarking land values for viability in planning (BLV)
BLV is a critical part of the viability assessment.
BLV’s should:
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be based upon Existing Use Value (EUV)
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allow for a premium to landowner
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reflect the implications of abnormal costs; site-specific infrastructure costs; and professional site fees
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be informed by market evidence including current uses, costs, and values
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be based on developments compliant with policies, including affordable housing, when recent market value evidence is used
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identify and evidence any adjustments to reflect the cost of policy compliance when this evidence is not available
The components of a BLV calculation
Existing use value (EUV)
This is the first component of calculating benchmark land value. EUV is the value of the land in its existing use, depending on the site and development types.
Existing use value plus (EUV+)
Sometimes known as the ‘Premium’, this is the second component of benchmark land value. It is the amount above EUV that goes to the landowner. The premium should provide a reasonable incentive for a landowner to bring forward land for development while fully allowing a contribution to comply with policy requirements.
Alternative use value (AUV)
This may be informative in establishing benchmark land value. This refers to the value of land for uses other than its existing use.
Common applications
Development appraisals are typically used by local planning authorities, practitioners, developers, development managers and funders to examine viability for a range of issues such as:
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local plan and CIL viability
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financial viability
- bidding for sites
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scheme feasibility (design)
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scheme feasibility (delivery)
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funding applications
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sensitivity testing
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mid-scheme design review
- public procurement
Last updated 10 December 2021 + show all updates
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Added link to session recording.
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First published.