New Build Investment Property Masterclass: Chapter 14 - Development is a series of risks (planning risk)
Development is a series of risks
Development is a series of risks. The developer manages these risks to deliver the development profit.
The developer's development profit is the 'GDV' less the cost of the risks associated with developing and selling the development. Think of it like this:
Gross Development Value, less
- Land risk: Cost of buying the land
- Planning risk: Cost of obtaining consent
- Construction risk: Cost of any demolition works and building a new building
- Sales risk: Cost of marketing and selling the development
- Finance risk: Cost of the capital employed for the development
= Development Profit
The content of a planning application varies between countries; however, their purpose is the same everywhere: to obtain the consent required to construct a new residential development.
Most planning applications broadly have the same content, and the intention is to provide as much detail as possible about what is proposed to be developed and how the new development will impact the local economy, infrastructure, and environment.
I have set out an overview of the English planning process to give you an understanding of the process a developer needs to go through to obtain planning consent. The English process is one of the most complex planning processes in the world, so in other countries, it is usually either similar or less complex.
National Planning Policy Framework
A National Planning Policy Framework (NPPF) sets out the government’s planning policies for England and how these are expected to be applied. The NPPF states that:
The planning system should be plan-led. Succinct and up-to-date plans should provide a positive vision for the future of each area and a framework for addressing housing needs and other economic, social, and environmental priorities.
Local Plans are prepared by the Local Planning Authority (LPA), which in practice is usually the council or the National Park authority for the area. Once the LPA has prepared a local plan, it must be submitted to the Secretary of State, who will appoint an inspector to carry out an independent examination. This process is dealt with by the planning inspectorate.
Local Plans set out the strategic priorities for the development of an area. They set out policies that cover housing, commercial, public, and private development, including transport infrastructure, together with protection for the local environment. They comprise a series of documents that should clarify what development will and will not be permitted in a specific area.
The objective of the Local Plan is to plan for the development and infrastructure communities need, setting out the strategic priorities for the area. This should include priorities to deliver housing (including affordable homes), as well as other key infrastructure to meet local demands.
Land will be designated as one of the following:
- For residential development;
- For mixed-use (including residential) or sui generis (Latin for “of its/his/her/their own kind, in a class by itself”, therefore unique);
- For an alternative form of development, such as industrial, retail, or commercial; or
- Not designated for any specific use.
For parcels of land already designated for residential development, the developer will simply make a planning application for residential development. However, for land which either has consent for an alternative form of development or has no development consent at all, the developer needs to apply for a change of use to the Local Planning Authority (LPA). This process can be extraordinarily complex, and can take many years.
Planning applications for residential development can be achieved through two forms of application: either a Full Planning Application or an Outline Planning Application.
Full planning application
A Full Planning Application, often referred to as a detailed planning application, allows a developer to start construction once it has been granted. Essentially, the developer can implement everything that was agreed in the full application unless there are conditions that need to be meet (discharged) as part of the grant of consent.
Full planning applications must include full detail of what is to be built, including access, the layout of the site, siting of the buildings with full plans, and elevations of all buildings. Highways and drainage details are also required. Full planning applications are always required for developments situated within a Conservation Area.
If the principle of development is unlikely to be an issue, it is more cost-effective and saves time for the developer to submit a full planning application. However, when development is more controversial, or the development will take several years to complete, or it will be constructed in several phases, it will be more difficult to justify the expense of a full planning application.
The following is the process with a full planning application:
- Formal planning application: A formal planning application is submitted to the LPA with relevant information for consideration.
- LPA validate application: The LPA will validate the application confirming its receipt of the application and relevant information required.
- LPA consultation: The LPA will consult with various stakeholders including the Environment Agency (EA), the Police, etc., to understand the impact of the proposed development on the surrounding environment and economy.
- Determination: The LPA then has a 13-week period in which to review and determine the planning application and either reject or approve it.
Planning applications can be determined by either of the following:
- The Planning Officer – under specifically designated powers; or more often, by
- The Planning Committee.
Once approval has been determined, the developer receives a Resolution to Grant Planning Approval. This is not a formal planning approval; it is merely an intention to grant a Planning Consent. Generally, this will be subject to several conditions being satisfied, referred to as ‘Planning Gain’. Planning gain is the amenity that is provided to the local council in exchange for giving the developer consent to develop the property. It can typically include social housing, new infrastructure, and taxes and levies. These are all costs incurred by the developer which will reduce their overall development profit.
Outline planning application
Outline Planning Applications are typically used for larger, more complex developments, where the scheme is likely to be developed over a longer period, or where the developer is looking to establish whether residential development will be granted for a site.
Outline planning applications must include enough detail for the LPA to evaluate the proposals, including the scale and nature of the proposed development. An outline consent allows the developer to gain assurance that development will be accepted in principle. However, an outline consent is not permission to build; it is simply the establishment of an outline for the broad parameters of a residential scheme on the land. Essentially, the outline permission has established the principle of residential development on the land.
An outline planning application allows fewer details about the proposal to be submitted. Once outline permission has been granted, the developer will need to obtain specific approval of the details (“reserved matters”) before they can start work on site. These details will be the subject of a “reserved matters” application at a later stage.
Where outline permission has been granted, a developer has three years from the outline approval to make an application for the outstanding reserved matters, i.e., to provide the information excluded from the initial outline planning application. This will typically include information about the layout, access, scale, and appearance of the development.
Risks associated with obtaining a planning consent
Developers must weigh up a series of risks in order to determine the best course to obtain planning approval. Local Planning Authorities are seen as highly inconsistent in the way they respond to planning applications, and rarely meet their own proposed timelines to process planning applications.
The primary risks associated with the planning process are in the following areas:
- Determining what to build: What the planning authority is likely to accept in terms of a building; how big, how much of the site is covered (the footprint of the building), and its height all impact how much new space can be built, and therefore the income it will generate. It is up to the developer to design a building that maximises the site, is financially feasible to build, and will be liked both by the planners and the local community.
- Time: Planning can take a long time to achieve, even though the guidance sets out that the LPA will determine a planning application within 13 weeks. The reality is that they rarely meet this timeline. Various reports have been published on housing delivery in the UK to speed the process up, but for all these pages of research, little has been achieved. Effectively, the time required to obtain planning permission for a new development has increased. The following were noted regarding the time required to obtain planning permission for developments with more than 20 homes:
- The Callcutt Review: Between 1.8 to 2.6 years.
- Molior: The average time taken to achieve planning consent in London is 497 days, with the longest recent application recorded taking 1,612 days.
- Rejection: Making a planning application carries no guarantee that it will be successful, and that development can take place. Many applications are unsuccessful, which presents a developer with three options:
- Go through a costly and lengthy appeal process which may or may not be successful.
- Amend the proposed development scheme, most likely to reduce the size of the development and therefore the volume of houses it can provide. This will reduce the GDV which can be generated, which means that without reducing the land cost (or other costs) the profit will be lower.
- Abandon the application altogether.
- Cost: The planning process can require many experts and some level of control over a parcel of land. This can be a highly costly process, and is subject to many risks.