FINAL REPORT
VIABILITY ASSESSMENT
REPORT
Sites C & E Canada Water
Develop ment Proposal
On Behalf of:
London Borough of Southwark
Reference: 1417315
Date:
June 2013
Version:
1.0
Prepared by:
Andrew Murphy MRICS
Development Consultant &
RICS Registered Valuer
James Purvis MRICS
Development Consultant &
RICS Registered Valuer
Restricted: Sites C & E, Canada Water
1.
Introduction & Background
1.1.
We have been instructed to consider the applicant’s Financial Viability
Assessment (FVA) dated January 2013 that was initially provided to DVS on
the 25th January 2013. The applicants FVA was augmented with further
information subsequently following further discussion with the applicant and
the Local Planning Authority (LPA).
Viability
1.2.
The RICS published a First edition guidance note “Financial Viability in
Planning” in August 2012 which is a best practice guidance note to guide
practitioners in the assessment of site wide and site specific viability
assessments as part of the Planning process.
1.3.
‘Financial viability has become an increasingly important material
consideration in the planning system. While the fundamental purpose of good
planning extends well beyond financial viability, the capacity to deliver
essential development and associated infrastructure is inextricably linked to
the delivery of land and viable development.’ – extract from RICS Guidance
National Planning Policy
1.4.
The National Planning Policy Framework (NPPF) emphasises scheme
deliverability and the provision of competitive returns to willing land owners
and developers to enable sustainable development to come forward.
1.5.
In respect of affordable housing, paragraph 50 of the NPPF aims to
significantly boost the supply of housing and states that where local planning
authorities have identified that affordable housing is needed, they should set
policies for meeting this need on-site, unless off-site provision or a financial
contribution of broadly equivalent value can be robustly justified. Such policies
should be sufficiently flexible to take account of changing market conditions
over time.
1.6.
The NPPF also recognises that development should not be subject to such a
scale of obligation and policy that threatens scheme viability. This reinforces
the need for viability testing in order to allow willing landowners and
developers to receive competitive returns which in turn enable the delivery of
development.
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1.7.
In the context of achieving sustainable development the NPPF refers to
ensuring viability and deliverability at sections 173-177. Section 173 in
particular states:
“…. To ensure viability, the costs of any requirement likely to be
applied to development, such as requirements for affordable housing,
standards, infrastructure contributions or other requirements should,
when taking into account of the normal cost of development and
mitigation, provide competitive returns to a willing land owner and
willing developer to enable the development to be deliverable.”
1.8.
The RICS GN addresses “competitive return” as follows:
“A “Competitive Return” in the context of property transactions is
usually acknowledged as the highest overall offer accepted for land or
premises, at that time, and should be constructed in accordance with
the definitions of Site Value in this guidance. A “Competitive Return” in
the context of a developer bringing forward development should be in
accordance with a “market risk adjusted return”, as defined in this
guidance, to the developer in viably delivering a project.”
1.10
In assessing the applicant’s Viability Assessment we have had regard to the
national policy background and the RICS Guidance Note First Edition
August 2012.
1.11
We set out our comments under the numbered sections of this report below.
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2.
Property Description and Location
Location
2.1
Canada Water is located on the Rotherhithe Peninsula in south east London
and is served by the Jubilee underground line, situated two stops east
of London Bridge and one west of Canary Wharf. The two development
sites referred to by the applicant as Site C & E are the subject of the
development proposals are located within the Rotherhithe Ward and are
located immediately east of Canada Water underground station.
Site C
2.2
We are advised by the applicant that Site C extends to 2.31 hectares (5.7
acres) and the site currently provides 224 surface car parking spaces and two
large retail units which are currently occupied by Decathlon. Unit 1 overlooks
the basin and extends to c. 3,756 Sq m (40,427 Sq ft) and Unit 2 c. 2,432 Sq
m (26,174 Sq ft).
2.3
We have not been provided with copies of the leases or rent review
memorandums. We are advised by the applicant the retail warehouses are let
to Decathlon by way of two leases expiring 2028, with tenant break options in
December 2016 and 2022.
2.4
The applicant sets out the leases are subject to fixed annual uplifts in
accordance with RPI uplifts. The applicant’s valuer Savills sets out they
understand the current combined rent to be £812,109 per annum.
2.5
We have not been provided with copies of the leases although we have been
provided with extract title reports dated July 2012. We are advised that
Decathlon have no intention of exercising the break clauses in the respective
leases.
2.6
However, we have been provided with a redacted copy of a conditional
Agreement for Lease relating to units 1, 2 & 3 Canada Water Retail Park dated
14 December 2012.
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Site E
2.7
We are advised that site E extends to an area of c. 0.78ha (2.11 acres) and is
situated east of Surrey quays Road and south of Canada Street which is
adjacent to Harmsworth Quay. The site accommodates a single detached
retail warehouse unit providing a retailing space with a gross internal area of
c. 2,000 sq m (21,528 sq ft).
2.8
We have not been provided with any tenancy information regarding this
property other than it is occupied by a discount retailer What Home & Leisure
on a short term informal basis.
2.9
We are advised by the applicant’s valuer the current gross passing rent is
£150,000 per annum but the net rent receivable after payment of business
rates and service charge is c. £46,000 per annum.
Ownership
2.10
The applicant’s advisor (DS2) sets out the freehold interest of Site C & E (title
number TGL215017 & TGL218564 respectively) is currently held by Canada
Water (Development) Limited. DS2 set out in the FVA that Canada Water
(Development) Limited is a subsidiary of Sellar Design & Management
although no documentary evidence has been provided.
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3.
Development Planning Proposal
3.1
The planning application submitted by the applicant is a hybrid application
being part detailed/outline and proposes to provide 5 separate buildings and
are referred to as C1, C2, C3, C4, and E1.
3.2
The application seeks outline permission for the demolition of all buildings and
the erection of 5 buildings (C1 – C4 and E1) ranging from 5 to 40 storeys
(150.86m AOD) and comprising a maximum overall floor space of up to
137,614 Sq m GEA.
3.3
This includes a maximum of up to 97,5741 Sq m of residential accommodation
(Class C3) (equating to up to 1,046 residential units), 12,308.9 Sq m Class A1
retail store (including 10,178 Sq m (net) sales area, 745 Sq m ancillary office
accommodation and 308 Sq m (ancillary café); 4,335 Sq m of other Class
A1/A2/A3/A4 floorspace); 2,800 Sq m office floor space (Class B1) up to 658
Sq m health centre floorspace (Class D1) and up to 698.2 Sq m of cinema
floorspace (D2); 19,271.8 Sq m ancillary parking, plant, and storage
accommodation, including the provision of basements to provide vehicle and
pedestrian access and new public amenity space and landscaping including
new public square.
Proposed Phasing of Development
3.4
Phase 1 (Building C1) – A mixed use building ranging in height from 5 to 17
storeys, providing a new decathlon store of 12,103 Sq m GIA, 235 residential
dwellings, 173 Sq m GIA of mixed retail space, basement car parking, storage
and plant areas and landscaping.
3.5
Phase 2 (Buildings C2 & C3) - Two mixed use buildings. C2 is an 8 storey
building providing 112 residential dwellings and 1,892 Sq m of mixed ground
floor retail space. C3 is a 16 storey building providing 190 residential units,
mixed retail 753 Sq m GIA and a cinema of 640 Sq m GIA and at basement
level phases 2 & 3 are connected.
3.6
Phase 3 – C4 is a mixed use 40 - storey tower providing 273 residential
dwellings and 709 Sq m GIA mixed retail to be linked at basement to Phase 2.
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3.7
Phase 4 – A mixed use building providing 21,999 Sq m GIA of residential
accommodation of up to 236 dwellings and up to 507 Sq m GIA of mixed retail
and up to 2,460 Sq m GIA mixed commercial a health centre of up to 573 Sq
m GIA together with basement car parking, storage, plant and associated car
parking.
In summary:
Phase 1 is submitted in full detail and no reserved matters,
Phase 2 & 3 are submitted in outline and the floor layouts of the
buildings and disposition of uses between floors and landscaping
will be subject to a separate reserved matters application.
Phase 4 is submitted in outline with layout, scale access,
appearance and landscaping all subject to reserved matters
application.
3.8
The design and disposition of uses and layout of phases 2 – 4 will be capable
of amendment in the future which will impact upon the revenue and cost
variables of the development scheme we are being asked to consider.
Consequently, it follows that any scheme amendments will vary the scheme
metrics and with that viability.
Floor space by Building
Building
Maximum GIA (Sq m)
Maximum GEA (Sq m)
C1
42,263 (fixed)
46,483.1
C2
14,410
14,648.2
C3
18,411
19,141
C4
26,371
27,431
E1
27,769
29,907
Total
128,924
137,612
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Restricted: Sites C & E, Canada Water
Floor Space by Use
Water Proposed Floorspace
January 2013
Land Use
GIA Sq m
GEA Sq m
Residential
C3
90,337
97,541
Office
B1
2,460
2,800
Decathlon
A1 – A4
12,103
12,308
Retail Store
Other retail
D2
4,035
4,334
Cinema
D1
640
698
Health Centre
D1
573
658
Parking, Plant
Ancillary
18,775
19,271
& Storage
Total
128,924
137,612
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Restricted: Sites C & E, Canada Water
4.
Information Relied Upon
4.1
In preparing this report we have had regard to a comprehensive amount of
information and correspondence. The key documents relied upon are:
Financial Viability Assessment (FVA) prepared by DS2 dated January
2013.
CD containing a copy of FVA together with scheme plans;
A copy of Savills Residential Property Focus Q4 2012;
An analysis of Residential Forecasts for London (Non prime) drawn
from Savills Residential Property Focus Q2 2012, Knight Frank UK
Housing Market Forecast Q4 2011;Jones Lang LaSalle UK Residential
market Forecast Nov 2011;
ProVal Appraisals for scheme proposal that include New Build Home
Buy and Affordable Rent Tenure mixes dated August 2011;
Use of IRR in Financial Viability Assessments Commentary prepared
by DS2 dated September 2012;
Cost inflation Forecasts – Davis Langdon Summary letter addressed to
R Goodlet dated 1 November 2012, Gleeds Economic and Regional
inflation report dated Q4 2012, G& T Tender Price Indicator Q1 2013.
A redacted extract from a Conditional Agreement For Lease between
Canada Water (Developments) limited and Sportstock Limited and
Decathlon Limited and Decathlon SA and Sellar Design &
Development Limited relating to Units 1, 2 and 3 Canada Water Retail
Park – NB. The agreement refers to annexures 1 – 15 and these have
not been provided.
Revised Argus Electronic models which capture JLL Residential
Values
Email correspondence dated 20 February timed at 19:47 setting out
information would be provided to support:
o Justification of 4% marketing and sales fees
o Details from Savills to support the Market Value they have
assessed Sites C & E to support the benchmark land value
relied upon at £25m
Copy correspondence from JLL dated 21 February 2013 addressed to
R Goodlet re: Pricing Rationale
Letter prepared by DS2 dated 26th April 2013
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E-mail prepared by DS2 containing Maple Quays pricing
E-mail prepared by DS2 dated 23rd May 2013 regarding residential
pricing and Internal Rate of Return
E-mail prepared by DS2 dated 17th May 2013 regarding residential
pricing and internal rate of return
E-mail dated 30th April 2013 containing revised Argus Electronic
models
E-mail dated 8th May 2013 containing revised Argus Electronic models
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5.
Methodology
5.1
The viability methodology adopted by DS2 reflects the nature of the proposed
development and they have considered viability on a present day basis and on
an out-turn basis as the project period envisages a phased programme over
11 years, therefore a growth model approach (revenue growth and cost
inflation) having regard to an Internal Rate of Return (IRR) as a measurement
of risk reward has been adopted.
5.2
The out-turn approach is not a common method of considering viability
assessments but it is an appropriate measurement of return for a multi-phased
schemes of this scale over the anticipated project programme of c. 11 years.
5.3
The applicant has contended the scheme is not viable on a present day cost
and revenue basis and it is therefore necessary to consider on an outturn
approach which adopts revenue growth and cost inflation over the duration of
the assumed project programme.
5.4
The merit of using an out-turn approach is that it can secure a known amount
of affordable housing and S106 planning obligations when the scheme on a
current cost and revenue approach is not viable.
5.5
The downside, however, is that growth and cost inflation is difficult to predict
and the amount of affordable housing and S106 contributions secured could
look insufficient if the market grows at a faster rate and the scheme
outperforms current forecast revenue and cost inflation projections.
5.6
Conversely, if the market declines relative to the forecast growth and cost
inflation assumptions contained in the financial model(s) the amount of the
affordable housing and S106 planning obligations will be overstated.
Financial Model
5.7
DS2 have used industry standard development appraisal software to appraise
the applicant’s project viability. The software calculates the development
revenue and costs subject to variables that are input to the model and the
project programme assumptions that inform the project cashflow.
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Appraisal Land Use Area Assumptions
5.8
Details of the proposed floor space for each land use that inform the financial
model(s) are set out above (Para 3.8) and this input field is informed by the
architects area schedules for the various phases for the land uses which are
envisaged as part of the planning application.
5.9
Apart from the first phase the residential unit numbers are based upon
average unit sizes and are calculated having regard to the applicant’s
proposed mix of units within each building envelope.
Efficiency
5.10
We have considered the gross to net floor areas assumptions that inform the
financial model and these appear to fall within an acceptable range, given the
stage of design of the scheme.
5.11
However, as the scheme evolves this should be reviewed as changes to the
scheme design and layout may serve to increase/decrease gross to net sale
areas. Clearly any change in floor layouts will serve to impact upon
construction costs and revenue that may currently be anticipated and it follows
the viability of the applicant’s proposals.
5.12
Phase 1 of the applicant’s proposals is the only phase to have been designed
together with layouts on the individual apartments. The remaining phases
2 – 4 are outline and therefore may be subject to change.
Internal Rate of Return
5.13
The IRR is calculated using a discounted cashflow appraisal at a discount rate
which equates the total costs and total revenue over the cashflow programme
period. An IRR measurement takes full account of the time value of money
and is used as the measure of profitability having regard to the time the
project takes to complete.
5.14
An IRR has been applied to the growth models where as an annualised
percentage this provides a measure of the rate at which the scheme
generates a return.
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5.15
The applicant’s advisor DS2 refers to IRR returns at Battersea Power Station,
Goodman Fields, New Covent Garden Market and Olympic Legacy Project
which they set out range between 17.5 – 18.0%.
5.16
More recently DS2 set out in an email dated 23rd May that an application in
respect of Shell Centre (in the London Borough of Lambeth) made reference
to a IRR hurdle rate in respect of the application in order to support their
assertion the threshold ungeared IRR for that project should be 20%.
5.17
DS2 set out in the email note this was anecdotal and they would seek to
obtain more detailed information, but to date no further information has been
provided.
5.18
We have considered the unqualified information at face value, and without a
more detailed understanding of the project (More particularly the risks
presented by the project given the location and the listed nature of the
building) it is difficult to comment any further.
5.19
In adopting the IRR for Canada Water the applicant has adopted a 2.5%
margin above a base IRR at 17.5% to reflect the scale and speculative nature
of the Canada Water proposals. However, we would comment development
activity by its very nature is speculative and this risk is implicit in the base IRR
at 17.5% and we can see no reason why the applicant is seeking to hedge by
adopting an additional margin at 2.5%.
5.20
In considering the IRR threshold return which the applicant is seeking to
reserve it would be helpful understand the scale of the projects which they are
seeking to rely upon (Battersea Power Station, Goodman Fields, New Covent
Garden Market and Olympic Legacy Project) as these projects will have
different site specific characteristics, project durations and will therefore be
subject to different patterns of revenue and costs to inform the relative risk
threshold returns.
5.21
In response to our request for more information to inform the applicant’s base
IRR threshold we received the following response.
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‘We are not in a position to provide additional detailed information on
the projects they we have previously referred to. The references to
these schemes were previously made in regard to relatively large
central London strategic developments to give a general indication in
terms of the market and funding requirement for such development.
They should not be assessed on the same basis as ‘standard’
development with reference to the quantum of development, the
extensive timescales envisaged and the riskier nature of the modelling
with growth/inflationary measures used to form a view on the level of
viable planning obligations that can be delivered.’
5.22
DVS have been involved in a number of strategic development proposals that
have been informed by revenue and cost inflation forecasts and key to
determining an appropriate IRR hurdle rate has been an understanding of the
pattern of construction cost expenditure relative to revenue receipts and
positive cashflows.
5.23
In considering this proposal alongside other recent schemes that we have
provided advice. These schemes have involved considerable upfront
infrastructure investment far in excess of £140m and over a longer time
period.
5.24
Therefore those schemes carry with them more risk than the proposal that we
are being asked to consider which is why we do not consider an IRR hurdle
rate at 20% is appropriate for this scheme.
5.25
More recently the applicant provided a letter dated 16 April 2013 from Investec
in their capacity as a property lender. The letter sets out the following
‘ I have reviewed and assessed the fundability of the scheme being proposed
by Canada water (Developments) Limited and would highlight 2 key
factors/issues.
Firstly, it should be pointed out that Investec would expect a development
project to show an ungeared IRR of between 20% and 25% as this is what we
(and we believe the lending market) deem to be an appropriate return for
development risk.
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As a lender we come across a number of potential development deals and the
majority of these show an ungeared IRR of around 25%. Therefore, when we
are presented with a project with an IRR of less than 20%, we would turn this
away on the basis (i) there are more profitable deals in the market which need
funding and (ii) for the IRR to be so low, it is likely the developer is overpaying
for the land, or insufficient revenue will be generated from the scheme relative
to the build costs.
Secondly, and with respect to the nuances of the scheme itself, it is apparent
that a lender would not start receiving any meaningful capital repayments until
a large number of sales have been achieved from phase 2. This is due to the
high costs of delivering phase 1, particularly the Decathlon store. This would
make a lender uncomfortable as it could take 4 – 5 years to reach this stage –
a lengthy period of time which would leave the bank vulnerable to construction
risk as well as unforeseen market events which could adversely impact the
GDV.’1
5.26
Whilst the applicant’s revised May dated appraisals IRR range between
15.29% - 16.10%, they clearly fall short of the Investec funding criteria. In
considering the comments set out above we are unsure of the relationship of
the bank with this development proposal despite their strict funding criteria
which they refer.
5.27
However, in considering the applicant’s proposal only phase 1 is designed in
detail and phase 2 is at outline. But it is reasonable for a developer at the next
stage of development design to optimise the scheme to improve the efficiency
and layout, and as part of this process they will value engineer.
5.28
It is at this point when the scheme has been worked up in more detail (i.e.
cost certainty and revenue sales research) will they really be in a position to
firm up the construction costs before re-casting their financial appraisals to
determine an IRR before engaging in detailed funding discussions.
1 Correspondence from Investec from Kyri Hadjisoteris dated 16th April 2013 addressed to LPA
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5.29
DS2 have also highlighted the Borough’s current CIL guidance and are
seeking to benchmark the scheme IRR hurdle rate to this and they highlight
the following:
In relation to current CIL guidance in the borough, Page 14 of the BNPP
Viability Study (January 2013) to support the CIL Charging Schedule states:
‘While Developer’s Profit has to be assumed in any appraisal, its level
is closely correlated with risk. The greater the risk, the higher the profit
level required by lenders. While profit levels were typically up to
around 15% of completed development value at the peak of the market
in 2007, banks now require schemes to show a higher profit to reflect
the current risk. Typically developers and banks are targeting 20-25%
Internal Rate of Return on a development scheme. IRR is used as a
key hurdle rate in determining viability, since it accounts for the length
of time a development takes, with a higher IRR reflecting a shorter
period to realise a return on an investment. Although IRR is readily
comparable with other investment opportunities, other measures of
profitability can include profit on cost or profit on Gross Development
Value (GDV). Our appraisal summaries provide reference to all three
measures, although IRR is targeted at 20%.’
5.30
Whilst these assumptions made by BNP have informed the Borough’s CIL
studies, this was a Borough wide study. This is distinct from what we are
being asked to consider, which is a site specific proposal having regard to a
planning application supported with architects plans, and detailed construction
cost plans, sales prices and assumptions drawn from a detailed proposal.
5.31
Whereas CIL studies do not consider this level of detail hence why they may
hedge their financial performance thresholds. Whilst this application is a
hybrid application in part the applicant and indeed DVS have considered this
proposal in far greater detail than the CIL study which was quite probably
prepared adopting wide ranging assumptions.
5.32
In taking into consideration all the comments above (Para 5.13 – 5.31) we
have adopted an ungeared IRR at 17.5% for this project on an outturn (growth
model) model. This opinion is informed through our involvement in a number
of strategic development proposals that were informed by cost inflation and
revenue growth forecasts; and key to determining an appropriate IRR hurdle
rate has been the pattern of construction cost expenditure relative to revenue
receipts and positive cashflows.
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5.33
In considering this proposal alongside other recent schemes that we have
provided advice. These schemes have involved considerable upfront
infrastructure investment far in excess of £170m and over a longer time period
and reserved an IRR in excess 17.5%.
5.34
In assessing on a present day model we would anticipate a reduced IRR
threshold below 20% as a risk reward threshold. The applicant has not
reduced their IRR hurdle rate.
5.35
We would expect a reduction to reflect the fact the metrics are not reliant upon
any revenue growth or cost inflation forecasts. We would expect a present day
model IRR to be c. 14.5 - 15%.
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6.
Assessment of Benchmark Land Value
Decathlon Store
6.1
In October 2010 a planning consent was secured in respect of site C by way of
a detailed planning consent for the redevelopment of the site.
6.2
The consent included the erection of six buildings varying in height from 4 to
10 storeys comprising 430 residential units (Class C3), a new replacement
retail store of 9,104 Sq m, 1,287 Sq m of other Class A1/A3/A4/A5 space, 644
Sq m of office space, 528 Sq m of community space, access, basement car
parking for 340 cars, public realm, landscaping and communal space.
6.3
We are informed that it was not possible to implement this proposal as the
retail accommodation proposed as part of the scheme is not acceptable to
Decathlon. Therefore in the absence of either their agreement or statutory
powers to assemble the site the scheme is frustrated until expiry of the lease.
Conditional Agreement for Lease
6.4
The applicant has entered into a conditional agreement for lease relating to
Units 1, 2 and 3 Canada Water Retail Park dated 14th December 2012. We
have been provided with a redacted extract of the agreement albeit we have
not been provided with a complete copy together with the annexures that
form part of the agreement between the parties.
6.5
The recitals of the document set out:
‘The Landlord (Canada Water (Developments) Limited plans to redevelop
Canada Water retail Park’…‘and intend to apply for the necessary planning
permission for such development to take place;
Once planning permission has been secured in terms of satisfactory to the
Landlord it will be necessary for the two existing units on the site that are
presently occupied by Decathlon to be demolished in order that a mixed use
development can be constructed on the site of the northernmost unit currently
occupied by Decathlon by way of a lease;
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Decathlon has agreed to vacate and surrender its interests in the two existing
units on the site it currently occupies and to take a lease of the retail part of
the said mixed use development;
The tenant has agreed to take long leasehold interest in the retail unit forming
part of the said mixed use development subject to and with the benefit of the
Decathlon Lease (as hereinafter defined);
The parties have agreed a temporary trading solution which will enable
Decathlon to continue trading from the southernmost unit that it presently
occupies (after enabling works have been undertaken by the Landlord, part of
the cost of which will be reimbursed to the Landlord by Decathlon) whilst
construction of the mixed use development take place, including the grant to
Decathlon of a temporary licence to occupy other premises within the site in
order immediately to provide a temporary Head Office facility for Decathlon;
The Landlord has appointed Sellar as development manager for the
development to be undertaken at the site in order to drive the development
through from application for planning permission to completion of the leases to
Decathlon and Sportstock respectively and the Agreed Programme identifies
the key milestones for the development; and
The parties have agreed to enter into this Agreement for Lease to govern their
respective rights and obligations in connection with the intended transaction.’
6.6
As part of the agreement Decathlon will pay a
premium to the Landlord
for the lease on completion of their new store to be located in building C1. It is
unclear how the premium has been determined and the terms of the new
lease.
Benchmark Land Value
6.7
As set out in our March 2013 report (as attached to this report) the applicant
initially adopted a site value of £25m without an evidence base to inform how
Savills arrived at their opinion of value.
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6.8
Since our draft report DS2 provided a number of retail warehouse investment
sales transactions and we make the following observations:
The evidence is drawn from standing investments located in established
edge of town locations with term certain income.
It is difficult to draw comparison on the NIY evidence provided as it is not
clear whether the income is reversionary or not?
The yield evidence ranges from 5.70% to 6.89% reflecting lot sizes of
between £3.2m - £24.4m
Site C has 3 yrs term certain income (tenant break options Dec 2016 &
2022).
Analysis of applicant’s opinion indicates an income multiplier reflects a
NIY yield of 6.5%.
It is unclear whether the property is rack rented as the annual rent is
subject to annual RPI uplifts.
We have visited Site C which is currently occupied by Decathlon and
operates as an outdoor sports retailer but we have not inspected the
property in any detail.
6.9
We have considered the investment evidence and in discussion with our retail
warehouse valuers the most comparable transaction (subject to our comments
above) would appear to be a property located in Leytonstone which analyses to
a passing rent of £13.50 psf and transacted Feb 2013 at £7m. This reflects a
net initial yield of 6.89% for 14yrs unexpired income (and is reflective of its
location on Leytonstone High Road adjoining secondary retailers in an
established retail pitch).
6.10
We have adopted this as our base yield and have adjusted to 7.5% to reflect
the uncertainties of a 3 year term certain income resulting in a value of c.
£10.23m but say £10.25m.
6.11
We accept the Site E value at £2m.
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6.12
We have not made any allowance for hope value for either Site C or E as the
applicant asserts the extant planning application is not viable. Clearly, if there
is any further information to support the values indicated by Savills we would
be happy to consider and review our opinion of value.
6.13
Based upon information provided DVS have assessed the existing use value
of the site at £12.25m. The applicant has since been revised their opinion of
the benchmark land value from £25m to £14.5m.
7.
Residential Revenue
Market Housing
Residential Revenue
7.1
Since issuing our draft report dated March 2013, we have met with the
applicant and discussed sales values in greater detail.
7.2
Subsequently, the applicant has provided further information in respect of
sales at the last phase of the adjacent Barrett’s Maple Quays scheme which is
the 24 storey tower “Ontario Point”.
7.3
To re-iterate a comment we made in our March report, we understand Block
C1 has been designed in detail whilst C2, C4 and C4 are currently at an
outline stage of design whilst Block E has yet to be designed in any detail.
7.4
Consequently, if any changes are made to buildings C2, C3, C4 and E (i.e. in
terms of layout, configuration, specification etc), it would follow that the sales
values could also change.
7.5
The applicant has also provided a schedule of sales for all apartments within
Ontario Point with sales dates ranging from March 2012 to April 2013.
7.6
The schedule provided states “net prices” in respect of each of the apartment
sales and upon discussing this with the applicant we were advised that these
prices relate to the actual price agreed between the developer and purchaser
and did not reflect incentives.
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7.7
However, we have undertaken research within our “in-house” property
database and sales from Ontario Point have started to transact. At the time of
writing this report, we have cross checked c. 20% of the 144 sales in Ontario
Point and the actual transaction price is not the same as the “Net Price” in the
sales schedule provided by the applicant.
7.8
Therefore, the evidence relied upon by the applicant is not the actual price
agreed between the developer of Ontario Point and the purchaser.
7.9
In considering these sales, the difference from the Net Price to the actual
transaction price ranges from values up to 14.61% higher than the net price
with the average uplift at present being c. 3%.
7.10
However, it should be noted that this only reflects a small number of
transactions and at present we are unable to cross check all sales and as a
result there may well be a larger/smaller average uplift from net to gross sales
price.
7.11
The applicant has provided a schedule entitled “Ontario Tower Comparison
May 2013” in which the “net sales prices” at Ontario Point have been
compared to Buildings C4 and C1.
7.12
In terms of considering the pricing undertaken by the applicant, over the first
24 floors overall building C4 shows values c. 16% higher than that at Ontario
Point and Building C1 overall shows values c. 10% lower than Ontario Point.
7.13
Whilst the applicants schedule shows the tower values are 16% higher than
Ontario Point, this is a misleading indicator as the Ontario Point prices are “net
prices” and do no reflect the actual transaction prices as referred to in
paragraph 7.8 above.
7.14
We would expect the proposed scheme to provide a product which is superior
to that provided at Maple Quays. Whilst the applicants C4 values on a unit by
unit basis appear to be higher overall than Ontario Point there is no evidence
available to suggest that their values should be 16% higher on an overall
blended value per sq ft rather than on a unit by unit basis.
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7.15
We highlight that we are not aware of any evidence to suggest whether the
proposed scheme values should be 10%, 15% or 30% higher than that at
Ontario Point on an overall blended rate per sq ft.
7.16
In addition, there is no justification to suggest why the pricing in building C1
should be 10% lower than Ontario Point.
7.17
The sales from Ontario Point are largely historic with sales occurring from
between March 2012 to April 2013. Consequently, these sales values will be
fall behind the current market in terms of revenue growth.
7.18
As a result, we have considered re-sale evidence from the adjacent Maple
Quays scheme in addition to data contained in the Land Registry House Price
index for this period.
7.19
There are a handful of re-sales that have taken place within the Maple Quays
scheme however; the most pertinent evidence shows an increase in value
from initial off plan sales to re-sale of 11.5% over a 9 month and 18 month
period covering 2012 and a 16% uplift from June 2011 to May 2013.
7.20
In addition, a sale has recently taken place in May 2013 which shows an uplift
in value from March 2012 of 7.5%.
7.21
As at the date of this report, there is an apartment currently on the market with
an asking price of £0.425m. The sales schedule provided by the applicant
states the net price of this apartment as being £0.299m in September 2012.
7.22
Whilst we appreciate this is only an asking price, this provides a contextual
background insofar that sales values show the possibility of increasing
considerably from the date of the initial off-plan sale.
7.23
At face value, a 30% uplift in value for the unit currently on the market appears
optimistic. However, the re-sale evidence currently available indicates that an
uplift in value from the initial sale in September 2012 to the present day is not
unreasonable.
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7.24
In addition, we have considered the sales from Ontario Point using the Land
Registry House price index and uplifted our updated sale prices (reflecting
what the units transacted at and not net prices) on a month by month basis in
line with the index.
7.25
In terms of assessing the applicant’s sales values, we have uplifted the
blended rates per sq ft adopted by the applicant within their appraisal model
by 6%.
7.26
This uplift takes into consideration that at present the applicant’s net prices for
the sales at Ontario Point are on average understated by c. 3% when
compared to the actual transaction prices.
7.27
Consequently, as Jones Lang La Salle have priced the proposed scheme on
the basis of net prices that are on average 3% understated we have followed
the logic that the pricing for the proposed scheme is understated by c. 3%. In
addition, the blended average revenue growth when applied across Ontario
Points equates to c. 3% which overall equates to a 6% uplift.
Car Parking
7.28
The applicant has valued all residential car parking spaces across the scheme
at £0.025m and for the purpose of this assessment we find this rate to be
acceptable.
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8.
Commercial Uses
8.1
The application scheme comprises a mix of commercial uses including offices,
retail, leisure, and other community uses. The proposal includes the following
approximate floor areas for each of these uses:
Land Use
GIA Sq m
GEA Sq m
Office
B1
2,460
2,800
Decathlon
A1 – A4
12,103
12,308
Retail Store
Other retail
D2
4,035
4,334
Cinema
D1
640
698
Health Centre
D1
573
658
Parking, Plant
Ancillary
18,775
19,271
& Storage
8.2
The conditional agreement to lease refers to replacement Decathlon retail
store having a net internal area of not less than 5,000 Sq m and a gross
internal area of not less than 5,700 Sq m at ground floor and an office unit
having a gross internal area of not less than 600 Sq m at the ground floor
mezzanine level.
8.3
The agreement to lease refers to a premium which Decathlon will pay to the
Landlord. In addition it is not clear how long the lease term or indeed the lease
terms to include any rent or management or service charges that may be
payable over the term.
Retail Revenue
Overview
8.4
We are informed that a detailed design for the retail units does not exist for the
scheme and whilst DVS requested details and values for proposed individual
units this has not been provided. In addition we are informed that proposed
breakdowns for the different classes (A1 – A5) within the retail is not available.
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8.5
Both of these factors are value significant; smaller units tend to attract higher
rental values per sq ft than larger units as do corner units and those with more
prominence and return frontage. Use classes A3 – A5 tend to attract higher
rental values than A1 – A2. Accordingly we would normally expect a more
detailed valuation breakdown for the retail units.
8.6
The applicant has adopted the following valuation assumptions in respect of
the retail units :
Retail A1-A3 £20-£25 psf
Local uses ( i.e. dry cleaners/pharmarcies) £18 - £20 psf
Gym £8 - £12 psf
Cinema £6 - £8 psf
Retail Rents
8.7
In support of the proposed rental values the applicant’s advisor refers to
quoting rents.
Retail Yields
8.8
Based on the applicant’s current retail vision and strategy, the initial yields at
6.5% do not seem unreasonable. However, as a more detailed design and
strategy evolves there will be a greater level of certainty. Furthermore a
change in strategy to secure anchor tenants with stronger covenant strengths
would see a reduction in yield for some of the units and thus a rise in value.
Rent Free & Void Periods
8.9
A rent free and void period of 12 months has been assumed in the applicant’s
models which we accept.
9.
Growth Assumptions
9.1
The merit of using an outturn approach is that it can secure a known amount
of affordable housing when the scheme on a current cost approach is not
viable. The downside, however, is that growth is difficult to predict and the
amount of affordable housing and S106 contributions secured could look
insufficient if the market grows at a faster rate and vice versa.
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9.2 The applicant has provided residential forecasts for Non-Prime London from
Savills, Knight Frank and Jones Lang LaSalle. The forecasts are historic
insofar that the Knight Frank & JLL report dates to November 2011 whilst the
Savills forecast is dated Q2 2012. In addition we have also been provided with
JLL residential research document dated November 2012.
9.3
For the purpose of this assessment we have adopted JLL growth forecast
assumptions dated November 2012 which we set out below:
London Residential House Price Forecast
2013
2014
2015
2016
2017
2018 - 2022
JLL
2.0%
3.5%
6.0%
7.5%
7.5%
5.3%
Source: JLL Residential Eye November 2012
9.4
It should be noted that the forecast relied upon by the applicant refers to Non-
Prime London and would cover a large geographic area. The forecast
therefore is not location specific and would not take into consideration the
impact of future changes to a specific location.
9.5
For example, the impact of the introduction of Crossrail at Canary Wharf in
c. 2018 could see a considerable impact on revenue growth at Canada Water
as it is located one stop from Canary Wharf on the Jubilee Line.
9.6
This could potentially widen the appeal of the proposed scheme to
international investors due to improved transport links to key business centre
locations in London in addition to enhanced transport links to Heathrow
Airport.
Construction Cost Inflation
9.4
In preparing the FVA the applicant adopted BCIS Tender Price Indices for
Greater London in the outturn modelling this forecast the following – 1.4% until
end of 2012, 1.8% in 2013, 3.2% in 2014, 3.5% in 2015, 4.2% in 2016 and
4.9% in 2017.
9.5
The applicant has also provided Tender Price Forecast prepared by Davis
Langdon dated November 2012 together with a number of other forecasts
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prepared by Gleeds and G & T. Having considered these we have adopted
the following blended average tender price growth:
G & T
DL
ECH
Sweett
Blended
London
London
London
Average
(4Q 12)
(4Q 12)
(4Q 12)
2013
0.5
0.75
0.3
2.0
0.89
2014
2.0
2.5
4.1
3.5
3.03
2015
3.0
4.0
4.0
4.0
3.75
2016
3.5
5.0
4.0
4.0
4.13
2017+
3.0
Commercial Value Growth
9.6
The applicant has not included rental growth on any of the rents that have
been adopted in the FVA as they set out that they have adopted the higher
order end of rents and lower voids.
9.7
However, after careful consideration we are of the opinion the outturn model
should track inflation as a minimum and we have adopted 2% per annum
growth over the project term as opposed to the straight line inflation forecast at
Para 12.8 which reflects a straight line annualised RPI inflation for the period
2012 – 2017 at 3.2% per annum.
10.
Construction Costs
10.1
We have been provided with Draft Feasibility Estimates for the scheme
proposals prepared by the applicant’s cost consultant which indicate the
construction costs are c. £300.5m.
10.2
As part of our pre-application dialogue with the applicant in the summer and
autumn 2012 we highlighted that at the next stage assessment we would
require a full detailed cost plan. A detailed cost plan was circulated to us 25
March 2013.
10.3
The Davis Langdon (DL) cost plan has evolved from where we initially
reviewed in autumn 2012. The build cost proposed by DL is c. £318.12m split
into two phases:
a. Phase 1 - £88.19m (Building C1)
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b. Phase 2 - £229.93m (Buildings C2, C3, C4 and E1)
10.4
Prior to receiving the detailed cost breakdowns, our assessment was based
purely on cost and value benchmarking drawn from recent viability exercises
we have undertaken. In reviewing the detailed cost plan we met with DL on
27th March to discuss and work through their cost plan.
10.5
Additional supporting information was subsequently by way of a CD received 9
April 2013 together with various email correspondence in clarifying questions
that were raised.
10.6
It is assumed the areas proposed represent the scope of the scheme and any
changes to the areas may materially affect the cost at the next stage of design.
We set out comments below:
Generally, the rates appear reasonable and DL confirmed that these came
from recent tenders received.
DL provided a summary of cost drivers which made the estimate higher in
relation to other schemes which we had considered and this supports the
difference between our initial benchmark assessment approach and the
earlier DL cost plan.
There is little information received with regards to the Mechanical and
Electrical package. At this stage, benchmarking information were utilised
which appears reasonable.
It is not clear at this stage whether the design of foundations would 'cater'
for the loadings above. At this stage, a separate allowance has been made
in the cost plan for a contribution to foundations reflective of individual
buildings. It is assumed that these will be firmed up at the next stage of
design development.
DL assume a similar level of fit out costs on Phase 2 based on Phase 1
information. It is expected that on the next phase of development, a
separate estimate will be prepared to be reflective of individual mix of each
buildings.
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Preliminaries, overheads and profit appear reasonable in relation to other
schemes looked at.
With regards to contingency, this is very subjective and I can understand
DL putting a higher contingency at 7.5% as Phase 2, M&E, are not yet fully
designed. This level of contingency should not apply to both phases 1 & 2
as phase 1 quite detailed relative to phase 2. With this in mind phase
should have a contingency at 5% and it is reasonable to assume that
contingency sums will reduce in line with design development.
At this stage of design, no value engineering exercise has been carried
out.
Building E1 has little information to rely upon, it is very subjective which
benchmark to use relative to values and no benchmarking exercise was
put forward by DL at this stage.
10.7
In summary our assessment ranges from £306.53m to £312.71m a difference
of c. -4% to -2% from the DL cost plan based on 5% to 7.5% contingency. The
range of difference is not unreasonable at the stage of design development.
However, it is expected that at the next stage of design, risk will be reduced
and cost certainty can be achieved.
11.
Additional Cost Headings
Professional Fees
11.1
The applicant has adopted professional fees at 14%. We would expect these
costs to fall within a range of 10 – 12%. However, for the purpose of this
assessment we have adopted 12% and this sits within the applicant’s range of
between 11.25 – 15.5% for professional fees as outlined in their FVA.
11.2
However, any developer taking forward this scheme would probably agree
fixed fees at a rate lower than the above percentage sum allowances.
Development Management Fee
11.3
The applicant is seeking to reserve a 2% development management fee to
reflect their costs of running the project. We do not accept the reservation of a
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development management fee as the costs of running a project for a market
developer would be a business overhead and not an additional development
cost.
Sales & Marketing Fees
11.4
The applicant has adopted a sales fee of 2% and marketing fee of 2%. For
the purpose of this review, our assessment adopts a sales fee of 1.5% and
marketing fee of 1.5%.
Finance
11.5
The applicant has adopted a finance rate of 7%. This rate falls at the upper
end of an acceptable range and we have adopted this for the purposes of our
assessment.
11.6
The model assumes 100% debt funding which does not necessarily reflect a
true market approach that would require equity participation. However, given
that we are assessing this scheme by way of an ungeared IRR performance
the finance rate is excluded.
Project Programme
11.7
We have adopted the application scheme’s project programme, however,
should the council wish to have this verified we will need to refer to a specialist
construction planner to test and determine whether the applicant’s proposed
timelines contained within the programme for the site preparation, construction
and fit-out works are reasonable.
11.8
Clearly any change in the programme i.e. extension or shortening of the
programme will impact upon the metrics of the scheme proposal.
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12.
Planning Obligations
12.1
The applicant’s FVA sets out a provision for total £12.547m and confirmation
from the LPA is required to confirm this is correct.
CIL
£4,154,850
Education
£1,131,079
Employment in the
£247,207
Development
Employment during
£1,073,018
Construction
Employment during
Construction (management
£84,092
fee)
Public Open space, Childrens Play Equipment & Sport
Development:
Open Space
£495,387
Children’s play equipment
£132,359
Sports Development
£1,208,112
Transport Strategic
£754,043
Transport Site Specific
£801,970
Public Realm
£1,063,470
Archaeology
£16,135
Health
£1,180,824
Community Facilities
£177,494
Affordable Housing
12.2
In addition to the provision for planning obligations the applicant has taken into
consideration a premium of £20m to reflect a commuted sum in lieu of
providing affordable housing on site as part of their proposal.
12.3
The applicant has also prepared another FVA model which considers the
provision of 10% and 15% on-site affordable housing. In determining the
affordable housing content the applicant has adopted a blended capital value
at £200 per sq ft which includes the provision of 70% affordable rent and 30%
intermediate tenures.
12.4
The accommodation will be tenure blind and will meet the same high
standards that are being proposed for the market housing.
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13.
Developer Return
Present Day Model
13.1
The applicant’s present day financial models based upon the applicant’s
assumptions indicate:
Scenario
Affordable Output
IRR
15% Affordable
156 mixed tenure
9.95%
10% Affordable
105 mixed tenure
10.50%
Commuted Sum
£20m
9.58%
13.2
The applicant’s agent asserts that in all three scenarios the models fall short of
the threshold IRR at 20% which they are seeking to rely upon as the risk
reward threshold return.
Outturn Model
13.3
The applicant’s outturn financial models based upon the applicant’s
assumptions indicate:
Scenario
Affordable Output
IRR
15% Affordable
156 mixed tenure
15.29%
10% Affordable
105 mixed tenure
15.57%
Commuted Sum
£20m
16.10%
13.4
The applicant’s agent asserts that in all three scenarios the models fall short of
the threshold IRR at 20% which they are seeking to rely upon as the risk
reward threshold return.
13.5
However, in having regard to our various comments and assumptions set out
above we are of the opinion the IRR on an outturn model would be 17.5%.
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14.
Conclusions
14.1
In summary, we have assessed the applicants 3 appraisal models which
comprise a £20m commuted sum, 10% onsite affordable housing contribution
and 15% onsite affordable housing contribution and we tabulate our viability
conclusions below.
14.2
Our opinion of the IRR hurdle rate for this project is 17.5%. However, the
applicant has requested that we model a sensitivity showing the applicants
20% IRR hurdle rate
DVS Sensitivity Models
Applicant Offer
6% Uplift & 17.5% IRR
6% Uplift & 20% IRR
Surplus generated in addition to the applicant offer in
left hand column
£20m
£23.20m
£8.35m
Commuted Sum
10% Onsite
£26.30m
£13.25m
Provision
15% Onsite
£24.10m
£12.15m
Provision
14.3
In summary, the above table indicates the potential surplus based upon a 6%
uplift in the applicants residential revenue blended rates per sq ft and a 17.5%
and 20% IRR hurdle rate.
14.4
Our assessment of the proposed scheme with a 17.5% IRR can support an
affordable housing offer equivalent to c. 25% by area on the basis of the
affordable housing being accommodated in Buildings E1 and C1.
Phase 1
14.5
The LPA have requested a breakdown of the performance of phase 1 in order
to show the pattern of expenditure relative to revenue and more specifically
the accumulative cashflow profile of the development scheme.
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14.6
We set out below a graph showing the performance of the scheme which
shows the scheme does not generate a positive return until February 2019:
14.7
More specifically in terms of phase 1 the total costs equate to c. £170m whilst
revenue is c. £111m which generates a shortfall in excess of £59m.
Review Mechanism
14.8
A fundamental area of concern to us is the level of detail that informs the
applicants FVA model as Phase 1 of the proposal is the only element of the
scheme that is subject to a detailed planning application and Phase 2 – 4 are
subject to an outline application and may be subject to change which will
impact upon the metrics of the FVA models.
14.9
The project has a programme of c. 11 years and the model relies upon
forecast revenue growth and cost inflation. These factors coupled with the
stage of design development of the scheme highlight the opportunity for the
scheme as a whole to either outperform or underperform the current
assumptions.
14.10
With this in mind we recommend the scheme should be reassessed by way of
a mechanism to test viability of a phase closer to the point of implementation
to more accurately assess viability having regard to more detailed design
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information to inform construction costs, revenue and assumptions as the
scheme is refined.
14.11
A review mechanism can set out the methodology of review which in this case
should entail a comprehensive review of any given phase ahead of
implementation as the inputs i.e. values and costs will have a greater degree
of accuracy with a detailed scheme to consider together with site specific
scheme revenue and cost evidence drawn from earlier phases at that time.
14.12
As the implementation of the project is currently envisaged to be phased over
11 years the inputs and evidence will be drawn from project based costs
incurred and residential sales prices which will more accurately indicate the
revenue the scheme is capable of generating and the reasonable costs of
construction that can be anticipated.
14.13
Clearly as and when the viability of individual phases is understood in more
detail the parties can then assess whether or not the LPA put in place a
mechanism to capture any improvement in the schemes actual performance
relative to the individual viability review or whether to roll-over to pump prime
future development phases of the scheme.
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Appendices
Appendix 1 - DVS Draft Report V.02 March 2013
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Appendix 1
DRAFT VIABILITY
ASSESSMENT
REPORT
Sites C & E Canada Water
Development Proposal
On Behalf of:
London Borough of Southwark
Reference: 1358541
Date:
March 2013
Version:
0.2
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1.
Introduction
1.1
We have been instructed to consider the applicant’s Financial Viability
Assessment (FVA) dated January 2013 that was initially provided to us 25
January 2013 and this was augmented with further information on 20 & 21
February 2013 following a meeting with the applicant on 6 February 2013.
Viability
1.2
Financial viability has become an increasingly important material
consideration in the planning system. While the fundamental purpose of good
planning extends well beyond financial viability, the capacity to deliver
essential development and associated infrastructure is inextricably linked to
the delivery of land and viable development.
1.3
The RICS published a First edition guidance note “Financial Viability in
Planning” in August 2012 which is a best practice guidance note to guide
practitioners in the assessment of site wide and site specific viability
assessments as part of the Planning process.
1.4
‘Financial viability has become an increasingly important material
consideration in the planning system. While the fundamental purpose of good
planning extends well beyond financial viability, the capacity to deliver
essential development and associated infrastructure is inextricably linked to
the delivery of land and viable development.’ – extract from RICS Guidance
National Policy
1.5
The National Planning Policy Framework (NPPF) emphasises deliverability
and the provision of competitive returns to willing land owners and developers
to enable sustainable development to come forward.
1.6
In respect of affordable housing, paragraph 50 of the NPPF aims to boost
significantly the supply of housing and states that where local planning
authorities have identified that affordable housing is needed, they should set
policies for meeting this need on- site, unless off-site provision or a financial
contribution of broadly equivalent value can be robustly justified. Such policies
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should be sufficiently flexible to take account of changing market conditions
over time.
1.7
The NPPF also recognises that development should not be subject to such a
scale of obligation and policy that threatens schemes viability. This reinforces
the need for viability testing in order to allow willing landowners and
developers to receive competitive returns which in turn enable the delivery of
development.
1.8
In the context of achieving sustainable development the NPPF refers to
ensuring viability and deliverability at sections 173-177. Section 173 in
particular states:
“…. To ensure viability, the costs of any requirement likely to be
applied to development, such as requirements for affordable housing,
standards, infrastructure contributions or other requirements should,
when taking into account of the normal cost of development and
mitigation, provide competitive returns to a willing land owner and
willing developer to enable the development to be deliverable.”
1.9
The RICS GN addresses “competitive return” as follows:
“A “Competitive Return” in the context of property transactions is
usually acknowledged as the highest overall offer accepted for land or
premises, at that time, and should be constructed in accordance with
the definitions of Site Value in this guidance. A “Competitive Return” in
the context of a developer bringing forward development should be in
accordance with a “market risk adjusted return”, as defined in this
guidance, to the developer in viably delivering a project.”
1.10
In assessing the applicant’s Viability Assessment we have had regard to the
national policy background and the RICS Guidance Note First Edition
August 2012.
1.11
We set out our comments under the numbered sections of this report below.
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2.0
Property Description and Location
Location
2.1
Canada Water is located on the Rotherhithe Peninsula in south east London
and it is served by the Jubilee underground line and is situated two stops
east of London Bridge and one west of Canary Wharf. The two development
sites referred to by the applicant as Site C & E are the subject of the
development proposals are located within the Rotherhithe Ward and are
located immediately east of Canada Water underground station.
Site C
2.2
We are advised by the applicant that Site C extends to 2.31 hectares (5.7
acres) and the site currently provides 224 surface car parking spaces and two
large retail units which are currently occupied by Decathlon. We are advised
by the applicant the retail warehouses are let to Decathlon by way of two
leases expiring 2028, with tenant break option in December 2016 and 2022.
2.3
We have not been provided with copies of the lease agreements that are in
place or the areas of the buildings. The applicant sets out the leases are
subject to fixed annual uplifts in accordance with RPI uplifts.
Site E
2.4
We are advised that site E extends to an area of c. 0.78ha (2.11 acres) and is
situated east of Surrey quays Road and south of Canada Street which is
adjacent to Harmsworth Quay. The site accommodates a single detached
retail warehouse unit providing a retailing space with a gross internal area of c.
2,000 sq m (21,528 sq ft).
Ownership
2.5
The applicant’s advisor (DS2) sets out the freehold interests of Site C & E (title
number TGL215017 & TGL218564 respectively) is currently held by Canada
Water (Development) Limited. DS2 set out in the FVA that Canada Water
(Development) Limited is a subsidiary of Sellar Design & Management
although no documentary evidence has been provided.
41
Restricted: Sites C & E, Canada Water
Site C
2.6
We are advised by the applicant’s consultant that site C is currently let to
Decathlon by way of two occupational lease expiring in 2028, with tenant
break options in December 2016 & 2022. We have not been provided with
copies of the leases although we have been provided with extract title reports
dated July 2012. We are advised that Decathlon have no intention of
exercising the break clauses in the respective leases.
2.7
However, we have been provided with a redacted copy of a conditional
Agreement for Lease relating to units 1, 2 & 3 Canada Water Retail Park dated
14 December 2012.
Site E
2.8
We have not been provided with any tenancy information regarding this
property and have drawn the conclusion that it is currently vacant and does
not generate an income.
3.0
Development Planning Proposal
3.1
The planning application submitted by the applicant is a hybrid application
being part detailed/outline and proposes to provide 5 separate buildings and
are referred to as C1, C2, C3, C4, and E1.
3.2
The application seeks outline permission for the demolition of all buildings and
the erection of 5 buildings (C1 – C4 and E1) ranging from 5 to 40 storeys
(150.86m AOD) and comprising a maximum overall floor space of up to
137,614 Sq m GEA.
3.3
This includes a maximum of up to 97,5741 Sq m of residential accommodation
(Class C3) (equating to up to 1,046 residential units), 12,308.9 Sq m Class A1
retail store (including 10,178 Sq m (net) sales area, 745 Sq m ancillary office
accommodation and 308 Sq m (ancillary café); 4,335 Sq m of other Class
A1/A2/A3/A4 floorspace); 2,800 Sq m office floor space (Class B1) up to 658
Sq m health centre floorspace (Class D1) and up to 698.2 Sq m of cinema
floorspace (D2); 19,271.8 Sq m ancillary parking, plant, and storage
accommodation, including the provision of basements to provide vehicle and
pedestrian access and new public amenity space and landscaping including
new public square.
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Restricted: Sites C & E, Canada Water
Proposed Phasing of Development
3.4
Phase 1 – C1 a mixed use building ranging in height from 5 to 17 storeys,
providing a new decathlon store of 12,103 Sq m GIA, 235 residential
dwellings, 173 Sq m GIA of mixed retail space, basement car parking, storage
and plant areas and landscaping.
3.5
Phase 2 – C2 & C3 two mixed use buildings C2 is an 8 storey building to
provide 112 residential dwellings and 1,892 Sq m of mixed ground floor retail
space. C3 is a 16 storey building to provide 190 residential units, mixed retail
753 Sq m GIA and a cinema of 640 Sq m GIA and at basement level phases 2
& 3 are connected.
3.6
Phase 3 – C4 A mixed use 40- storey tower to provide 273 residential
dwellings and 709 Sq m GIA mixed retail to be linked at basement to Phase 2.
3.7
Phase 4 – A mixed use building to provide 21,999 Sq m GIA of residential
accommodation of up to 236 dwellings and up to 507 Sq m GIA of mixed retail
and up to 2,460 Sq m GIA mixed commercial a health centre of up to 573 Sq
m GIA together with basement car parking, storage, plant and associated car
parking.
Phase 1 is submitted in full detail and no reserved matters,
Phase 2 & 3 are submitted in outline and the floor layouts of the
buildings and disposition of uses between floors and landscaping
will be subject to a separate reserved matters application.
Phase 4 is submitted in outline with layout, scale access,
appearance and landscaping all subject to reserved matters
application.
3.8
The design and disposition of uses and layout of phases 2 – 4 will be capable
of amendment which will impact upon the revenue and cost variables of the
scheme we are being asked to consider and it follows this will vary the
scheme metrics and with that viability.
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Restricted: Sites C & E, Canada Water
Floor space by Building
Building
Maximum GIA (Sq m)
Maximum GEA (Sq m)
C1
42,263 (fixed)
46,483.1
C2
14,410
14,648.2
C3
18,411
19,141
C4
26,371
27,431
E1
27,769
29,907
Total
128,924
137,612
Floor Space by Use
January 2013
Land Use
GIA Sq m
GEA Sq m
Residential
C3
90,337
97,541
Office
B1
2,460
2,800
Decathlon
A1 – A4
12,103
12,308
Retail Store
Other retail
D2
4,035
4,334
Cinema
D1
640
698
Health Centre
D1
573
658
Parking, Plant
Ancillary
18,775
19,271
& Storage
Total
128,924
137,612
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Restricted: Sites C & E, Canada Water
4.0
Information Relied Upon
4.1
In preparing this report we have had regard to a comprehensive amount of
information and correspondence. The key documents relied upon are:
Financial Viability Assessment (FVA) prepared by DS2 dated January
2013.
CD containing a copy of FVA together with scheme plans;
A copy of Savills Residential Property Focus Q4 2012;
An analysis of Residential Forecasts for London (Non prime) drawn
from Savills Residential Property Focus Q2 2012, Knight Frank UK
Housing Market Forecast Q4 2011;Jones Lang LaSalle UK Residential
market Forecast Nov 2011;
ProVal Appraisals for scheme proposal that include New Build Home
Buy and Affordable Rent Tenure mixes dated August 2011;
Use of IRR in Financial Viability Assessments Commentary prepared
by DS2 dated September 2012;
Cost inflation Forecasts – Davis Langdon Summary letter addressed to
R Goodlet dated 1 November 2012, Gleeds Economic and Regional
inflation report dated Q4 2012, G& T Tender Price Indicator Q1 2013.
A redacted extract from a Conditional Agreement For Lease between
Canada Water (Developments) limited and Sportstock Limited and
Decathlon Limited and Decathlon SA and Sellar Design &
Development Limited relating to Units 1, 2 and 3 Canada Water Retail
Park – NB. The agreement refers to annexures 1 – 15 and these have
not been provided.
Revised Argus Electronic models which capture JLL Residential
Values
Email correspondence dated 20 February timed at 19:47 setting out
information would be provided to support:
o Justification of 4% marketing and sales fees
o Details from Savills to support the Market Value they have
assessed Sites C & E to support the benchmark land value
relied upon at £25m
Copy correspondence from JLL dated 21 February 2013 addressed to
R Goodlet re: Pricing Rationale
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Restricted: Sites C & E, Canada Water
5.0
Methodology
5.1
The methodology adopted by DS2 reflects the nature of the proposed
development and they consider this on a present day basis and on an outturn
as the project period envisages a phased programme over 11 years, therefore
a growth model approach (revenue growth and cost inflation) having regard to
an Internal Rate of Return (IRR) as a measurement of risk reward has been
adopted.
5.2
The approach is not a common method of considering viability assessments
but it is an appropriate measurement of return for multi-phased schemes over
the anticipated project programme.
5.3
The application scheme has been assessed on both a current cost and
revenue basis, which is the usual approach for considering viability, and an
outturn approach which adopts revenue growth and construction cost inflation
in the development appraisal.
5.4
The applicant has contended the scheme is not viable on a present day cost
and revenue basis and it is therefore necessary to consider on an outturn
approach which adopts revenue growth and cost inflation over the duration of
the assumed project programme.
5.5
The merit of using an out-turn approach is that it can secure a known amount
of affordable housing and S106 planning obligations when the scheme on a
current cost and revenue approach is not viable.
5.6
The downside, however, is that growth and cost inflation is difficult to predict
and the amount of affordable housing and S106 contributions secured could
look insufficient if the market grows at a faster rate and the scheme
outperforms current forecast revenue and cost inflation projections.
Financial Model
5.7
DS2 have used industry standard development appraisal software to appraise
the applicant’s project viability. The software calculates the development
revenue and costs subject to variables that are input to the model and the
project programme assumptions that inform the project cashflow.
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Restricted: Sites C & E, Canada Water
Appraisal Land Use Area Assumptions
5.8
Details of the proposed floor space for each land use that inform the financial
model are set out above (Para 3.8) and this input field is informed by the
architects area schedules for the various phases for the land uses which are
envisaged.
5.9
Apart from the first phase the residential unit numbers are based upon
average unit sizes and are calculated having regard to the applicant’s
proposed mix of units within each building envelope.
Efficiency
5.10
We have considered the gross to net floor areas assumptions that inform the
financial model and these appear to fall within an acceptable range, given the
stage of design of the scheme.
5.11
But as the scheme evolves these should be reviewed as changes to the
scheme design and layout may serve to increase/decrease gross to net sale
areas. Clearly any change in floor layouts will serve to impact upon
construction costs and revenue that may currently be anticipated and it follows
the viability of the applicant’s proposals.
5.12
Phase 1 of the applicant’s proposals is the only phase to have been designed
together with layouts on the individual apartments. The remaining phases 2 –
4 are outline and therefore may be subject to change.
Internal Rate of Return
5.13
The IRR is calculated using a discounted cashflow appraisal at a discount rate
which equates the total costs and total revenue over the cashflow programme
period. An IRR measurement takes full account of the time value of money
and is used as the measure of profitability having regard to the time the
project takes to complete.
5.14
An IRR has been applied to the growth models where as an annualised
percentage this provides a measure of the rate at which the scheme
generates a return.
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Restricted: Sites C & E, Canada Water
5.15
The applicant’s IRR hurdle benchmark at 20% is not considered reasonable
for this residential led scheme as at the date of this report.
5.16
The applicant’s advisor DS2 refers to IRR returns at Battersea Power Station,
Goodman Fields, New Covent Garden Market and Olympic Legacy Project
which they set out range between 17.5 – 18.0%.
5.17
In adopting the IRR for Canada Water the applicant has adopted a 2.5%
margin above a base IRR 17.5% to reflect the scale and speculative nature of
the Canada Water proposals.
5.18
In considering the IRR threshold return which the applicant is seeking to
reserve it would be helpful understand the scale of the projects which they are
seeking to rely upon (Battersea Power Station, Goodman Fields, New Covent
Garden Market and Olympic Legacy Project) as these projects will have
different site specific characteristics, project durations and will therefore be
subject to different patterns of revenue and costs to inform the relative risk
threshold returns.
5.19
Therefore, without a better understanding of the projects which DS2 refer it is
difficult to consider and arrive at a reasoned opinion in respect of the base
IRR they are seeking to rely upon before turning to consider the additional
margin of 2.5%.
5.20
In the absence of the applicant providing further information we would
anticipate an ungeared IRR falling at the lower end of a range of 15 – 17.5%
for this project on an outturn (growth model) model.
5.21
In assessing on a present day model we would anticipate a reduced IRR
threshold below 20% as a risk reward threshold. The applicant has not
reduced their IRR hurdle rate.
5.22
We would expect a reduction to reflect the fact the metrics are not reliant upon
any revenue growth or cost inflation forecasts. We would expect a present day
model IRR to fall within a range of 12 – 14%.
48
Restricted: Sites C & E, Canada Water
6.0
Assessment of Benchmark Land Value
Decathlon Store
6.1
In October 2010 a planning consent was secured in respect of site C by way of
a detailed planning consent for the redevelopment of the site.
6.2
The consent included the erection of six buildings varying in height from 4 to
10 storeys comprising 430 residential units (Class C3), a new replacement
retail store of 9,104 Sq m, 1,287 Sq m of other Class A1/A3/A4/A5 space, 644
Sq m of office space, 528 Sq m of community space, access, basement car
parking for 340 cars, public realm, landscaping and communal space.
6.3
We are informed that it was not possible to implement this proposal as the
retail accommodation proposed as part of the scheme is not acceptable to
Decathlon. Therefore in the absence of either their agreement or statutory
powers to assemble the site the scheme is frustrated until expiry of the lease.
Conditional Agreement for Lease
6.4
The applicant has entered into a conditional agreement for lease relating to
Units 1, 2 and 3 Canada Water Retail Park dated 14th December 2012. We
have been provided with a redacted extract of the agreement albeit we have
not been provided with a complete copy together with the annexures that
form part of the agreement between the parties.
6.5
The recitals of the document set out:
‘The Landlord (Canada Water (Developments) Limited plans to redevelop
Canada Water retail Park’…‘and intend to apply for the necessary planning
permission for such development to take place;
Once planning permission has been secured in terms of satisfactory to the
Landlord it will be necessary for the two existing units on the site that are
presently occupied by Decathlon to be demolished in order that a mixed use
development can be constructed on the site of the northernmost unit currently
occupied by Decathlon by way of a lease;
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Restricted: Sites C & E, Canada Water
Decathlon has agreed to vacate and surrender its interests in the two existing
units on the site it currently occupies and to take a lease of the retail part of
the said mixed use development;
The tenant has agreed to take long leasehold interest in the retail unit forming
part of the said mixed use development subject to and with the benefit of the
Decathlon Lease (as hereinafter defined);
The parties have agreed a temporary trading solution which will enable
Decathlon to continue trading from the southernmost unit that it presently
occupies (after enabling works have been undertaken by the Landlord, part of
the cost of which will be reimbursed to the Landlord by Decathlon) whilst
construction of the mixed use development take place, including the grant to
Decathlon of a temporary licence to occupy other premises within the site in
order immediately to provide a temporary Head Office facility for Decathlon;
The Landlord has appointed Sellar as development manager for the
development to be undertaken at the site in order to drive the development
through from application for planning permission to completion of the leases to
Decathlon and Sportstock respectively and the Agreed Programme identifies
the key milestones for the development; and
The parties have agreed to enter into this Agreement for Lease to govern their
respective rights and obligations in connection with the intended transaction.’
6.6
As part of the agreement Decathlon will pay a
premium to the Landlord
for the lease on completion of their new store to be located in building C1. It is
unclear how the premium has been determined and the terms of the new
lease.
Benchmark Land Value
6.7
To date the applicant has provided a letter from Savills dated 6 November
2012 which sets out their “view” which is referred to as a “Red Book Valuation
letter”.
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Restricted: Sites C & E, Canada Water
6.8
In looking at the letter the author refers to valuation work relating to sites C
& E on behalf of Investec and it is unclear when this work was undertaken
and the author sets out some very broad ranging information regarding the
areas of Unit 1 & 2 and site E.
6.9
In arriving at the Market Value it is unclear what precisely the valuer is
assessing (freehold or leasehold) and the assumptions the valuer has
made to inform their opinion of value at £18m and £7m.
6.10
On the information presented by the applicant the Freehold of site C will have
the benefit of 3 years term certain income reflecting the opportunity for the
tenant to exercise the first break clause in 2016. Thereafter there could be
some value attributable to “hope value” for redevelopment of the site. Albeit
DS2 set out in the FVA the extant permission is not viable without Decathlons
agreement to surrender their leases ahead of expiry date of 2028.
6.11
Therefore, to consider in broad terms if the leases in place for site C generates
an income of c. £800,000 per annum subject to RPI uplifts. This could broadly
account for c. £3m of value.
6.12
But without an understanding of the development scheme Savills had in mind
to reflect the hope value of the reversionary development scheme to inform a
Market Value of £18m - It is difficult to assess and determine a robust Market
Value as a benchmark for the applicant’s proposal.
6.13
In looking at site E Savills value of £7m has been arrived at having regard to
short term gross income of c. £150,000 per annum and after deduction for
service charge and business rates a net rent receivable of c. £46,000 per
annum an existing use value of £2m and a Market Value of £7m.
6.14
But it is worth noting the FVA prepared by DS2 is silent regarding any lease or
licence income in respect of site E and the uncertainties regarding alternative
use land values that could be reasonably be anticipated – similar to site C it is
difficult to arrive at any robust conclusions.
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Restricted: Sites C & E, Canada Water
6.15
However, for the purpose of assessment we have adopted the applicant value
at £25m but will expect the applicant to rationalize and support the benchmark
land value which they have relied upon to inform the FVA.
7.0
Residential Revenue
Market Housing
Residential Revenue
7.1
Section 8 of the applicants FVA comments upon the residential revenue
adopted for the application scheme.
7.2
The applicants appraisal model adopts the following blended capital values
per sq ft for each building and we list these as follows:
Block C1 -
£540 per sq ft
Block C2 -
£580 per sq ft
Block C3 -
£600 per sq ft
Block C4 -
£800 per sq ft
Block E -
£560 per sq ft
7.3
We understand Block C1 has been designed in detail whilst C2, C4 and C4
are currently at an outline stage of design whilst Block E has yet to be
designed in any detail.
7.4
Consequently, if any changes are made to buildings C2, C3, C4 and E (i.e. in
terms of layout, configuration, specification etc), it would follow that the sales
values could also change.
7.5
The applicant’s commentary in respect of Maple Quays makes reference to
historic sales values from 2008 / 2009 in Toronto House in addition to sales in
Brampton House, Vancouver House and Ontario Point ranging from March
2012 to September 2012.
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Restricted: Sites C & E, Canada Water
7.6
However, it should be noted that the sales referred to in Brampton House,
Vancouver House and Ontario Point are off-plan sales and the buildings have
not yet reached practical completion.
7.7
Consequently, there is a dearth of current available evidence that can be
interpreted as reliable market evidence. In addition, it should be noted that
when these sales transact, the values will be historic as they would have been
agreed with contract dates significantly pre-dating the practical completion of
the building.
7.8
For example, we understand Ontario Point is due to reach practical completion
in June 2013 and at present there are only 5 units available in this building.
The apartments sold off plan will be shown as transacting in June 2013,
however, the apartment values will reflect historic values as shown in the
applicants with sales occurring in March – September 2012.
7.9
As a result, these sales values will be fall behind the current market in terms of
revenue growth.
7.10
Jones Lang LaSalle have prepared a unit by unit pricing schedule for blocks
C1, C2, C3 & C4 in addition to providing letters to support their pricing dated
22 January and 21 February 2013.
7.11
In preparing their values, JLL have provided a schedule of sales figures on the
adjacent Ontario Point Tower at Maple Quays and Marine Wharf located at
Surrey Quays.
7.12
As Ontario Point is located within the same immediate locality as the
application scheme we comment on these sales figures provided by JLL
below.
7.13
As with the Maple Quays sales figures quoted by the applicant in section 8 of
the FVA, the sales figures are not completed transactions and reflect prices
that have been agreed during construction of the building.
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Restricted: Sites C & E, Canada Water
7.14
Whilst the schedule of values provide a contextual background to agreed
prices for apartments in the tower, the schedule does not provide sufficient
detail in terms of when the sales were agreed.
7.15
We understand the building was launched in early 2012 and consequently, if
JLL have placed reliance upon sales that were agreed a year ago, it is
doubtful whether the values used by JLL as a base for pricing the application
scheme reflect current values.
7.16
In addition, the prices tabulated by JLL reflect “Net Prices” and we would
expect to be provided with the prices the properties will transact at and not
prices which we have assumed deduct costs incurred by the developer.
7.17
In their letter dated 21st February 2013, JLL have provided a pricing rationale
which provides a “high level” over-view on how they have approached the
pricing of the scheme and we set out our comments using the same headings
as set out in their letter.
Location
7.18
The JLL letter states:
“
we have assessed the scheme in terms of where it sits in relation to
transport connections, local amenities and access to key employment
areas of the City. In addition, we have focused on the micro-location
of the site looking at the amenity provision on site as well as the
communal open space allocated to future residents”
7.19
Whilst JLL have stated they have assessed the scheme against a number of
factors, their letter does not provide an over-view/conclusions of their
assessment in terms of transport, local amenity etc and it is unclear where JLL
view the scheme in terms of these attributes against other locations and
residential values.
7.20
In addition, it is unclear what amenity provision has been considered and in
what context.
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Restricted: Sites C & E, Canada Water
Unit Positioning
7.21
JLL have stated they have attributed premiums for apartments in accordance
with “prescribed standards” and when attaching premiums to units they have
considered floor level, desirability of view and amount of natural light.
7.22
It is unclear what JLL mean by using the term “prescribed standards”, we are
unaware of any prescribed standards used to undertake a unit by unit pricing
exercise as each scheme will be valued upon its own merits/characteristics.
7.23
Whilst JLL intimate they have attached premiums to units considering floor
level and views, they have not provided any information to inform which
apartments warrant a premium, how much this premium is and why.
7.24
In addition, buildings C2, C3 and C4 have only been designed in outline and it
is unclear from the indicative layouts whether apartments have a dual aspect
or outside space etc as this will have a significant impact on an assessment of
whether apartments values are negated by poor natural light and impact on
views etc.
7.25
JLL have termed the Tower (C4) as an iconic building and it is unclear what
JLL understand an iconic building to comprise. In considering whether the
building at present is iconic we consider the following points:
1) We have been provided with an outline specification for the
scheme
that
provides
unbranded
fittings/appliances
and
consequently there is no differentiation of product in the
apartments in terms of specification (Ontario Point provides a
branded specification with improved specification on the upper
floors).
2) The building has not yet been designed in detail and therefore
layouts/unit mixes of apartments could change as the scheme
evolves.
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Restricted: Sites C & E, Canada Water
3) There is no differentiation of product through the building, for
example, the unit mix/apartments remains standard through all
floors. We would expect an “iconic” building to provide a broad
range of product to include Penthouse apartments, duplex
apartments etc.
7.26
In terms of the values attributed to the Tower (C4), JLL have stated the units
at the lower levels will be affected by road noise and pollution and that the
lower levels will be visually impacted by natural light and by being overlooked.
7.27
We have considered where the Tower is situated within the overall proposal
and the Tower is not located next to a road and is not overlooked by other
buildings as the Tower sits opposite a large pedestrianised area. Therefore, it
is unclear how JLL have arrived at their conclusions.
7.28
JLL have attached what they believe to be industry standard premium
increments per floor of £2,000 for 1 bed units, £3,000 for 2 bedroom units and
£4,000 for 3 bedroom units.
7.29
In support of this uplift per floor they have quoted development schemes
where similar increments have been used (Providence Tower, The Landmark
and Baltimore Wharf), however, we have not been provided with any
examples of values of apartments from these schemes that serve to illustrate
this point.
7.30
The adjacent Maple Quays scheme (Ontario Point) is the most comparable
scheme in terms of assessing base values for the application scheme and
consequently it is unclear why JLL have not cited Ontario Point as a
comparable for assessing floor increments.
7.31
We have considered JLL’s letter dated 22nd January 2013 in which they
provided details of “Net Prices” for apartments at Ontario Point. In considering
these prices, we have noted a £21,850 floor level differential between 2
apartments of the same layout etc on levels 13 and 14.
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Restricted: Sites C & E, Canada Water
7.32
Consequently, the floor differential of between £2,000 - £4,000 is clearly not
prescriptive and we would expect the premiums per floor for the upper floors
of the Tower with uninterrupted views to attract premiums in excess of this.
7.33
However, as stated above, Ontario Point has yet to reach practical completion
and at present clear-cut evidence of the premiums for apartments on the
upper floors of Ontario Point are not yet available.
7.34
Whilst the development schemes JLL had regard to may provide indicative
guidelines for increments of value on a floor by floor basis, the most reliable
evidence would be that of sales for Ontario Point. Albeit adjustments would
need to be made for capital value growth for sales that were agreed during
construction significantly prior to practical completion.
7.35
When analysing unit positioning JLL have assumed social rented
accommodation is separated from the private accommodation by core, and
that there is no affordable in the upper levels of the towers.
7.36
However, we understand the applicant is only proposing that affordable
housing is provided in Building E and consequently is unclear whether the
apartment values put forward by JLL reflect the application scheme proposals.
Phasing
7.37
JLL have stated “in principle the plots in some of the later phases should be
able to achieve higher values than the pioneering plots, all other elements
being equal, as these blocks will benefit from the infrastructure being delivered
and the vision of the scheme being clear”
7.38
We agree with the comment that the latter phases of the scheme will achieve
the highest values as the scheme evolves creating a sense of place-making
with the introduction of commercial space comprising bars, restaurants etc.
7.39
However, we understand there is no infrastructure being delivered as part of
the scheme and it is unclear why JLL have made reference to this.
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Restricted: Sites C & E, Canada Water
Residential Revenue Conclusion
7.40
We have reviewed the values relied upon by the applicant in addition to the
supporting information provided by JLL.
7.41
In summary, the values proposed by JLL for Building C1 and the general price
points for the rest of the scheme from a “high level perspective” do not appear
to be unreasonable.
7.42
However, as set out above there is a dearth of recent transactions at Maple
Quays as currently Brampton House, Vancouver House and Ontario Point are
nearing practical completion. Bearing this in mind, once transactions within
these buildings complete, a high percentage of these sale prices will be
historic as prices would have been agreed between the developer and
purchaser off-plan during the buildings construction period.
7.43
In considering the sales values, as the majority of the scheme is at an outline
stage of design there remains the opportunity that Buildings C2, C3, C4 and E
will evolve over time giving rise to changes to unit mixes, layouts, apartments
types, specification etc to respond to demand, changes in the locality and it
would follow that sales values will also change as a result.
7.44
The application scheme will generate its own market with values that may
outperform the immediate local market (Maple Quays/initial phases of
application scheme) and this will be dependent upon the branding and place-
making the scheme generates and this will evolve over the design process.
7.45
As the scheme evolves, the pricing of residential units will be influenced by the
product on offer, demand and the price points at which previous sub-phases
have sold.
7.46
Considerable product differentiation will be required across the scheme due to
potential competition of “second hand” stock from previous phases competing
with the release of “new” buildings coming forward and this could have a
detrimental impact on achieving optimum scheme revenue.
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Restricted: Sites C & E, Canada Water
7.47
JLL are of the view the main value drivers for the scheme are proximity to
transport and the City, proximity to the river and the iconic status the
developer can attach to the scheme.
7.48
We would agree with the main value drivers identified by JLL and bearing this
in mind we would highlight the potential significance the impact of the
introduction of Crossrail at Canary Wharf which is anticipated to open in
2017/2018 (which is mid-way through the application schemes project
programme).
7.49
In March 2012, JLL forecasted over a 6 year period to 2018 that the impact of
Crossrail at Canary Wharf will result in an increase in residential values of c.
46% due to improved transportation links to other parts of London.
7.50
In considering Canada Water in the context of the impact of Crossrail at
Canary Wharf, we would also expect Canada Water to benefit in terms of uplift
in residential values due to improved transportation links at Canary Wharf.
7.51
Putting this in context, Canada Water is one stop away from Canary Wharf on
the Jubilee line and anticipated journey times from Crossrail at Canary Wharf
are 39 minutes to Heathrow, 6 minutes to Liverpool Street and 11 minutes to
Tottenham Court Road.
7.52
In summary, the JLL letter dated 22nd January 2013 refers to “net sales prices”
for apartments in Ontario Point that have not yet transacted. In considering
these values, we assume that a “net price” reflects a deduction made to the
gross price to reflect developer’s costs etc. In addition, we would expect
these sales figures to reflect historic agreed prices.
7.53
Consequently, to guide our initial assessment we have adjusted the values
relied upon by the applicant by 10% to reflect that the pricing of the scheme
has been based upon historic “net prices” for Ontario Point which would
require adjustment to a gross prices plus revenue growth.
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7.54
Having regard to our comments the applicant will need to undertake some
further work in order support the residential values. As they stand the JLL
commentary and values would not satisfy 3rd party scrutiny, and as such are
not considered to be robust.
Car Parking
7.55
The applicant has valued all residential car parking spaces across the scheme
at £0.025m and for the purpose of this assessment we find this rate to be
acceptable.
8.0
Commercial Uses
8.1
The application scheme comprises a mix of commercial uses including offices,
retail, leisure, and other community uses. The proposal includes the following
approximate floor areas for each of these uses:
Land Use
GIA Sq m
GEA Sq m
Office
B1
2,460
2,800
Decathlon
A1 – A4
12,103
12,308
Retail Store
Other retail
D2
4,035
4,334
Cinema
D1
640
698
Health Centre
D1
573
658
Parking, Plant
Ancillary
18,775
19,271
& Storage
8.2
The conditional agreement to lease refers to replacement Decathlon retail
store having a net internal area of not less than 5,000 Sq m and a gross
internal area of not less than 5,700 Sq m at ground floor and an office unit
having a gross internal area of not less than 600 Sq m at the ground floor
mezzanine level.
8.3
The agreement to lease refers to a premium which Decathlon will pay to the
Landlord. In addition it is not clear how long the lease term or indeed the lease
terms to include any rent or management or service charges that may be
payable over the term.
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Retail Revenue
Overview
8.4
We are informed that a detailed design for the retail units does not exist for the
scheme and whilst DVS requested details and values for proposed individual
units this has not been provided. In addition we are informed that proposed
breakdowns for the different classes (A1 – A5) within the retail is not available.
8.5
Both of these factors are value significant; smaller units tend to attract higher
rental values per sq ft than larger units as do corner units and those with more
prominence and return frontage. Use classes A3 – A5 tend to attract higher
rental values than A1 – A2. Accordingly we would normally expect a more
detailed valuation breakdown for the retail units.
8.6
The applicant has adopted the following valuation assumptions in respect of
the retail units :
Retail A1-A3 £20-£25 psf
Local uses ( i.e. dry cleaners/pharmarcies) £18 - £20 psf
Gym £8 - £12 psf
Cinema £6 - £8 psf
Retail Rents
8.7
In support of the proposed rental values the applicant’s advisor refers to
quoting rents
Retail Yields
8.8
Based on the applicant’s current retail vision and strategy, the initial yields at
6.5% do not seem unreasonable. However, as a more detailed design and
strategy evolves there will be a greater level of certainty. Furthermore a
change in strategy to secure anchor tenants with stronger covenant strengths
would see a reduction in yield for some of the units and thus a rise in value.
Rent Free & Void Periods
8.9
A rent free and void period of 12 months has been assumed in the applicant’s
models which we accept.
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9.0
Growth Assumptions
9.1
The merit of using an outturn approach is that it can secure a known amount
of affordable housing when the scheme on a current cost approach is not
viable. The downside, however, is that growth is difficult to predict and the
amount of affordable housing and S106 contributions secured could look
insufficient if the market grows at a faster rate.
9.2
The applicant has provided residential forecasts for Non-Prime London from
Savills, Knight Frank and Jones Lang LaSalle. The forecasts are historic
insofar that the Knight Frank & JLL report dates to November 2011 whilst the
Savills forecast is dated Q2 2012. In addition we have also been provided with
JLL residential research document dated November 2012.
9.3
We have not been provided with the exact definitions for what the forecasts
relate to. In addition, some of the forecasts relied upon by the applicant are
some what historic and it is unclear whether these forecasts are relevant as at
the date of this report.
9.4
For the purpose of this assessment we have adopted JLL growth forecast
assumptions dated November 2012 which we set out below:
London Residential House Price Forecasts
2013
2014
2015
2016
2017
2018 - 2022
JLL
2.0
3.5
6.0
7.5
7.5
5.3
Source: JLL Residential Eye November 2012
Construction Cost Inflation
9.5
In preparing the FVA the applicant adopted BCIS Tender Price Indices for
Greater London in the outturn modelling this forecast the following – 1.4% until
end of 2012, 1.8% in 2013, 3.2% in 2014, 3.5% in 2015, 4.2% in 2016 and
4.9% in 2017.
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9.6
The applicant has also provided Tender Price Forecast prepared by Davis
Langdon dated November 2012 together with a number of other forecasts
prepared by Gleeds and G & T. Having considered these we have adopted
the following blended average tender price growth:
G & T
DL
ECH
Sweett
Blended
London
London
London
Average
(4Q 12)
(4Q 12)
(4Q 12)
2012
-0.5
-0.5
-0.5
-1.0
-0.625
2013
0.5
0.75
0.3
2.0
0.89
2014
2.0
2.5
4.1
3.5
3.03
2015
3.0
4.0
4.0
4.0
3.75
2016
3.5
5.0
4.0
4.0
4.13
Commercial Value Growth
9.7
The applicant has not included rental growth on any of the rents that have
been adopted in the FVA as they set out that they have adopted the higher
order end of rents and lower voids.
9.8
However, after careful consideration we are of the opinion the outturn model
should track inflation as a minimum and we have adopted 2% per annum
growth over the project term as opposed to the straight line inflation forecast at
Para 12.8 which reflects a straight line annualised RPI inflation for the period
2012 – 2017 at 3.2% per annum.
10.0
Construction Costs
10.1
We have been provided with Draft Feasibility Estimates for the scheme
proposals prepared by the applicant’s cost consultant which indicate the
construction costs are c. £300.5m.
10.2
As part of our pre-application dialogue with the applicant in the summer and
autumn 2012 we highlighted that at the next stage assessment we would
require a full detailed cost plan. Despite our previous comments this has not
been provided. Therefore, in undertaking our review we have had to
benchmark against similar schemes.
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10.3
This indicates construction costs could potentially be reduced by c. 5-8%
without changing the contingency sum which is currently at 7.5% which
indicates a cost reduction of c. £25m.
11.0
Additional Cost Headings
Professional Fees
11.1
The applicant has adopted professional fees at 14% and we would expect
these costs to fall within a range of 10 – 12%. However, any developer taking
forward this scheme would probably agree fixed fees at a rate lower than
percentage sum allowances.
Development Management Fee
11.2
The applicant is seeking to reserve a 2% development management fee to
reflect their costs of running the project. We do not accept the reservation of a
development management fee as the costs of running a project for a market
developer would be a business overhead and not an additional development
cost.
Finance
11.3
The applicant has adopted a finance rate of 7%. This rate falls at the upper
end of an acceptable range and we have used this for the purposes of our
assessment.
11.4
The model assumes 100% debt funding which does not necessarily reflect a
true market approach that would require equity participation.
Project Programme
11.5
We have adopted the application scheme’s project programme, however,
should the council wish to have this verified we will need to refer to a specialist
construction planner to test and determine whether the applicant’s proposed
timelines contained within the programme for the site preparation, construction
and fit-out works are reasonable.
11.6
Clearly any change in the programme i.e. extension or shortening of the
programme will impact upon the metrics of the scheme proposal.
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12.0
Planning Obligations
12.1
The applicant’s FVA sets out a provision for total £12.547m and confirmation
from the LPA is required to confirm this is correct. In parallel we require the
applicant to double-check the breakdown as this appears to equate to
£12,520,040 as shown below:
CIL
£4,154,850
Education
£1,131,079
Employment in the
£247,207
Development
Employment during
£1,073,018
Construction
Employment during
£84,092
Construction (management
fee0
Public Open space, Childrens Play Equipment & Sport
Development:
Open Space
£495,387
Children’s play equipment
£132,359
Sports Development
£1,208,112
Transport Strategic
£754,043
Transport Site Specific
£801,970
Public Realm
£1,063,470
Archaeology
£16,135
Health
£1,180,824
Community Facilities
£177,494
Total
£12,520,040
Affordable Housing
12.2
In addition to the provision for planning obligations the applicant has taken into
consideration a premium of £20m to reflect a commuted sum in lieu of
providing affordable housing on site as part of their proposal.
12.3
The applicant has also prepared another FVA model which considers the
provision of 10% and 15% on-site affordable housing but until we have
addressed a number of issues concerning the information provided by the
applicant we have not considered in any detail rather than incur abortive costs.
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13.0
Developer Return
Present Day Model
13.1
The applicant’s present day financial models based upon the applicant’s
assumptions indicate:
Scenario
Affordable Output
IRR
15% Affordable
156 mixed tenure
11.29%
10% Affordable
105 mixed tenure
11.96%
Commuted Sum
£20m
10.07%
13.2
The applicant’s agent asserts that in all three scenarios the models fall short of
the threshold IRR at 20% which they are seeking to rely upon as the risk
reward threshold return.
13.3
However, we have not considered the applicant’s affordable housing scenarios
at this stage in any detail and have chosen to concentrate upon the commuted
sum scenario.
13.4
Based upon the assumptions and comment set out above our model indicates
an IRR return of 16.69% which exceeds the applicants assessment by c.
6.62% and indicates there would be a surplus in addition to the £20m
commuted sum.
Outturn Model
13.5
The applicant’s present day financial models based upon the applicant’s
assumptions indicate:
Scenario
Affordable Output
IRR
15% Affordable
156 mixed tenure
18.78%
10% Affordable
105 mixed tenure
15.84%
Commuted Sum
£20m
15.83%
13.6
The applicant’s agent asserts that in all three scenarios the models fall short of
the threshold IRR at 20% which they are seeking to rely upon as the risk
reward threshold return.
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13.7
However, in having regard to our various comments and assumptions set out
above we are of the opinion the returns on an outturn model would fall
between an IRR of 15% - 17% and in all scenarios the IRR exceed 15%.
13.8
We have only focussed upon the commuted sum scenario and based upon
the assumptions and comment set out above our model and IRR range
indicates a surplus falling between c. £45m – c. £58m.
14.0
Conclusions
Developers Return
14.1
We have considered the applicant’s assumptions and we are of the opinion
that an appropriate IRR for an outturn model would be at the lower end IRR
range of 15 – 17.5% for this project. In considering an appropriate IRR for a
Present Day model we are of the opinion this threshold would be lower and
fall within 12 – 14%.
Outline Stage of Scheme Design
14.2
A fundamental area of concern to us is the level of detail that informs the
applicants FVA model as Phase 1 of the proposal is the only element of the
scheme that is subject to a detailed planning application and Phase 2 – 4 are
subject to an outline application and may be subject to change which will
impact upon the metrics of the FVA models.
Residential Revenue
14.3
The applicant will need to undertake some further work in order support the
residential values as per our comments in section 7 of this report.
Commuted Sum Scenario
14.4
Our assessment has focussed upon the commuted sum scenario and based
upon our assumptions and comment set out in the main body of our report this
currently indicates a surplus falling between c. £45m – c. £58m (in addition to
£20m commuted sum).
Benchmark Land Value
14.5
For the purpose of this assessment we have adopted the applicant’s
benchmark land value which has been assessed by applicant’s valuer at
£25m.
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14.6
On a very broad ranging basis the term certain income equates to c. £3m and
given the applicant has set out the extant consent for site C is not acceptable
to Decathlon and therefore the site could not be assembled we are unsure
how the applicant’s valuer arrives at an opinion of £25m? Therefore it will be
helpful to understand precisely how they arrived at their opinion of Market
Value for sites C & E.
Programme
14.7
The project has a programme of c. 11 years and the model relies upon
forecast revenue growth and cost inflation. These factors coupled with the
stage of design development of the scheme highlight the opportunity for the
scheme as a whole to either outperform or underperform the current
assumptions.
Review Mechanism
14.8
With this in mind we recommend the scheme should be reassessed by way of
a mechanism to test viability of a phase closer to the point of implementation
to more accurately assess viability having regard to more detailed design
information to inform construction costs, revenue and assumptions as the
scheme is refined.
14.9
A review mechanism can set out the methodology of review which in this case
should entail a comprehensive review of any given phase ahead of
implementation as the inputs i.e. values and costs will have a greater degree
of accuracy with a detailed scheme to consider together with site specific
scheme revenue and cost evidence drawn from earlier phases at that time.
14.10
As the implementation of the project is currently envisaged to be phased over
11 years the inputs and evidence will be drawn from project based costs
incurred and residential sales prices which will more accurately indicate the
revenue the scheme is capable of generating and the reasonable costs of
construction that can be anticipated.
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14.11
Clearly as and when the viability of individual phases is understood in more
detail the parties can then assess whether or not the LPA put in place a
mechanism to capture any improvement in the schemes actual performance
relative to the individual viability review or whether to roll-over to pump prime
future development phases of the scheme.
69