Object

Representation ID: 1784

Received: 12/12/2014

Respondent: Cogent Land LLP (Cogent)

We note that in their representation responses to Savills, BNP has made the following comment "BNPRE strongly disagrees (that) the profit margin relates to risk.The approach taken reflects the reduced risk associated with developing affordable housing as any risk associated with take up of intermediate housing is borne by the acquiring RP, not by the developer. A reduced profit level on the affordable housing reflects the GLA Development Control Toolkit and the Homes and Communities guidelines in both its Economic Appraisal Tool (EAT) and Development Appraisal Tool (DAT). We would also highlight that this approach has been accepted at numerous CIL examinations and site assessments BNPPRE has undertaken"

In response, we would highlight the following:
*Relationship between profit and risk BNPhave commented that they do not agree that profit margins relate to risk. This contradicts the NPPF which states that to ensure viability; developments should provide competitive returns to a willing land owner and willing developer. We would also highlight a recent appeal decision where the Inspector commented that 'The amount required by a developer to undertake the development is a reflection of the anticipated risk;
*Brownfield Land on previously developed land. These sites by their very nature can require significant upfront costs and abnormal costs that would not be required on greenfield sites. In these instances, the profit margin and Return on Capital Employed (ROCE) becomes much more important. The minimum profit margin required by housebuilders and their lenders is 20% on gross development value (GDV). However, this increases where the risk and/or upfront costs are higher, i.e. for regeneration and brownfield sites. We would therefore expect a minimum of 20% on GDV (blended) to be tested;
*Reduced risk for affordable housing - We strongly disagree with the assertion from BNP that risk associated with take up of intermediate housing is borne by the acquiring RP, not by the developer it assumes that the developer has already secured a Registered Provider prior to securing the site. It is increasingly common for developers to purchase land prior to securing an offer from Registered Providers. In these instances, the risk has not been lowered and developers will subsequently apply the same risk profile to the entire site;
*Toolkits The GLA and HCA toolkits were produced when grant funding was still readily available for affordable housing. In todays market, grant funding for affordable housing is less readily available. It is therefore common practice for developers to purchase sites before they have secured the sale of the affordable housing. Developers are subsequently subject to market risk across both the private and affordable housing. There is subsequently a risk associated with the affordable housing, in addition to increased holding and finance costs that was not present under previous systems of funding. A blended rate reflective of this increased risk should therefore be applied across the entire site;
*Blended Rates BNP have applied a profit rate of 20% on GDV for the private element and 6% on GDV for the affordable. This reflects the following blended rates, which are significantly below the minimum level accepted by national house builders:
* 30% Affordable Housing 15.8% on GDV
* 20% Affordable Housing 17.2% on GDV
In support of the above, we have attached a report on Competitive Developer Return (Appendix 3), which provides further evidence on the minimum profit margins required by Plc housebuilders. Taking all of this in to account, we would therefore ask that a minimum profit level of 20% on GDV (blended) plus 25% ROCE across all tenures, subject to consideration of the risk profile of the scheme, is adopted in the viability testing.