Arklow Road Trading Estate, Deptford, London, SE14 6EB … · London, SE14 6EB, September 2015...

$Page 1: Arklow Road Trading Estate, Deptford, London, SE14 6EB … · London, SE14 6EB, September 2015 Viability Assessment for LB Lewisham S:\Planning\WP_Docs\SOUTH\Suzanne\Projects\Arklow$
Arklow Road Trading Estate, Deptford, London, SE14 6EB Viability Assessment

for LB Lewisham PRIVATE & CONFIDENTIAL September 2015

Prepared by GL Hearn Limited 280 High Holborn London WC1V 7EE T +44 (0)20 7851 4900 glhearn.com

London, SE14 6EB, September 2015 Viability Assessment for LB Lewisham

GL Hearn Page 2 of 30S:\Planning\WP_Docs\SOUTH\Suzanne\Projects\Arklow Trading Estate\Report\Arklow Road Viability Report Final.docx

Contents Section Page

1 BACKGROUND 4

2 THE PROPOSED DEVELOPMENT 7

3 BASIS OF ANALYSIS 8

4 RESIDENTIAL 13

5 COMMERCIAL 18

6 APPLICANT’S ASSUMPTIONS (INTERMEDIATE SCHEME) 21

7 ALTERNATIVE MASTERPLAN SCHEME 25

8 VIABILITY SUMMARY 29



Quality Standards Control The signatories below verify that this document has been prepared in accordance with our quality control

requirements. These procedures do not affect the content and views expressed by the originator.

This document must only be treated as a draft unless it is has been signed by the Originators and approved

by a Business or Associate Director.

DATE ORIGINATORS APPROVED September 2015 Guy Ingham George Barnes Associate Director

Limitations

This document has been prepared for the stated objective and should not be used for any other purpose

without the prior written authority of GL Hearn; we accept no responsibility or liability for the consequences of

this document being used for a purpose other than for which it was commissioned.



1 BACKGROUND

1.1 GL Hearn has been instructed by LB Lewisham to undertake a viability assessment in respect of a

proposed re-development at Arklow Road Trading Estate for which planning applications have been

submitted by Anthology Deptford Limited (the Applicant).

1.2 The site comprises a number of industrial and warehouse units and hardstanding which is accessed

via Arklow Road to the east and Rolt Street to the west. In total we are informed that there are 11

light industrial units divided into three individual blocks of one and two storeys.

1.3 The site area is broadly triangular in shape and extends to approximately 1.02 ha (2.52 acres) and

is bordered by mainline railway tracks to the north, south and west and Arklow Road to the east.

1.4 JLL have produced two separate reports detailing two separate planning applications in respect of

the site – a masterplan scheme which includes land within Network Rail’s ownership, and a second

“intermediate” scheme on land wholly within Anthology’s ownership. There is a lot of commonality

between the two applications / viability reports and therefore the approach we have adopted in

respect of the structure of our report is to focus on the intermediate scheme but highlighting the

material differences between the intermediate scheme and masterplan scheme in Section 7 of this

report.

1.5 It is important to highlight that JLL viability analysis has relied on a number of sources of third party

advice. Specifically the information has been incorporated in their assessment includes:-

• Schedule of accommodation – Rolfe Judd; • Floorplans provided by Rolfe Judd (June 2015); • Cost Estimate Summary – Capita (28 July 2015); • Details of the planning obligations from Turleys; • Indicative offers from three Registered Providers in respect of the affordable housing units; and • Indicative rental offer in respect of the assumed studio floorspace.

Planning History

1.6 The site forms part of a wider site allocation, the 'Arklow Road Mixed Use Employment Location' as

defined by the Council's Adopted Site Allocation DPD 2013 (site reference SA9) and Core Strategy

2011 (Policy 4). These policies require mixed use, employment-led development (B1 light industrial

uses) of at least 20% of the built floorspace with housing (indicative capacity 100 units and to

include on-site affordable).



1.7 The policy position requires 50% affordable to be secured unless it can be demonstrated through

viability that lower provision is appropriate. Any assessment must demonstrate that the maximum

level of affordable housing contribution has been secured.

1.8 The Applicant's planning consultants are seeking the following planning permission:

1.9 “Demolition of existing buildings and construction of mixed use development in buildings ranging

from 5 to 9 storeys comprising up to 287 residential dwellings (Class C3), up to 3,039 sq m flexible

commercial floorspace (Classes A1, A2, A3, B1, D1 and D2), disabled vehicle and cycle parking,

landscaping, access and other associated work”.

1.10 The new application for the Intermediate Scheme seeks to provide mixed use development ranging

from 5 to 9 storeys to comprise 287 residential units, to include 14% affordable housing provision,

and 3,039 sq m of flexible commercial floorspace, to be accommodated within six blocks. The

development will also include 16 disabled car parking spaces, commercial and residential cycle

spaces, bin storage and plant.

The Applicants Viability Position

1.11 The applicant’s viability consultant JLL has concluded that assuming a Mayoral CIL payment of

£813,365, Borough CIL payment of £1,650,229, S.106 payment of nil and Social Housing Relief on

the basis of a 14% provision of affordable housing amounting to £300,911 and a developer’s return

of 21.36% on costs, the proposed scheme results in a residual land value of £2,990,000. It has

calculated that the appropriate Benchmark Land Value (BLV) should be £5,300,000.

1.12 Accordingly JLL conclude that the scheme falls £2,310,000 below the BLV and therefore cannot

support further planning obligation payments. However the Applicant has confirmed that despite the

viability position they are committed to bringing the development forward including this level of

affordable housing notwithstanding the viability shortfall.

1.13 The purpose of this report is to review this assertion and to advise the Council whether this is a

reasonable position from a viability perspective.

1.14 Specifically the Council requires the following:

• Advice on whether it would be viable for a policy compliant scheme to be delivered • If a policy compliant scheme is not viable, advice on the maximum achievable quantum of on-

site affordable housing which it would be viable to provide;



Confidentiality

1.15 This report is provided to LB Lewisham (“the Council”) on a confidential basis. We request that the

report not be disclosed to any third parties under the Freedom of Information Act (Section 41 and

43 (2)).



2 THE PROPOSED DEVELOPMENT (INTERMEDIATE SCHEME)

2.1 The Applicant is proposing to develop a mixed use scheme comprising six blocks of flexible

A1/A2/A3/B1/D1/D2 space spread over the ground and first floors and 287 apartments to include 40

affordable units with disabled vehicle and cycle parking, landscaping and associated works. The

table below provides a breakdown of the residential element detailing the split of bedrooms and

total floorspace.

Residential Unit Number Area (NIA) sq m Area (NIA) sq ft

1 bedroom 134 7,107 76,498

2 bedroom 121 9,026 97,151

3 bedroom 32 3,075 33,103

Total 287 19,208 206,752

2.2 Included within the proposal is a flexible mix of A1/A2/A3/B1/D1/D2 space spread over the ground

and first floors. The table below details the proposed floor space for the commercial element.

Commercial Unit Floor Area (GIA) sq m Area (GIA) sq ft

Block A G / 1 245 2,637

B1 G 187 2,013

B3 1 1,380 14,854

B4 G 584 6,286

Block B G / 1 2,151 23,153

Block D G / 1 643 6,921

3,039 32,711

2.3 In addition seventeen disabled car parking spaces will be provided at ground floor level within the

site as well as commercial and residential cycle spaces.

2.4 The buildings are arranged in a perimeter format with parking and landscaping running through the

middle of the site. The buildings are situated largely at the northern and southern boundaries

fronting onto the railways, with Blocks A, B1, B2, B3 and B4 in the northern portion of the site and

Blocks F, E, C and D situated in the southern area of the site. Blocks B4 and D have frontage onto

Arklow Road.



3 BASIS OF ANALYSIS

3.1 Within their viability assessment JLL have referred to the GLA guidance on viability for benchmarks

for planning and also the Royal Institution of Chartered Surveyors (RICS) guidance note on

‘Financial Viability in Planning’ in August 2012. The latter defines viability for planning purposes as:

An objective financial viability test of the ability of a development project to meet its costs including the cost of planning obligations, while ensuring an appropriate Site Value for the landowner and a market risk adjusted return to the developer in delivering that project

3.2 We do not take issue with the overarching methodology used by JLL within their assessment. They

have:

• Assessed the realisable value of the proposed scheme; • Assessed the costs associated with delivering the scheme including provision of a build cost

plan • Undertaken a residual appraisal to calculate development value; • Benchmarked this against what they consider to be an appropriate measure of site value.

3.3 JLL have used the Argus Developer appraisal programme to assess the viability of the development.

This is a commercially available, widely used software package for the purposes of financial viability

assessments. The methodology underpinning viability appraisals is the Residual Method of

Valuation, commonly used for valuing development land. Firstly, the gross value of the completed

development is assessed and the total cost of the development is deducted from this.

3.4 The approach adopted by JLL has been to fix the developer’s assumed profit requirements (17.5%

on Gross Development Value (GDV) on the private and commercial units and 6% on GDV in

respect of the affordable units) in the appraisal producing an output which is the residual land value.

With this approach, if the residual land value is lower than the benchmark land value, then the

scheme is deemed to be unviable and is therefore unlikely to come forward for development unless

the level of affordable housing and/or planning obligations can be reduced.

3.5 In this case of the intermediate scheme, JLL’s initial analysis indicates the following:

• Benchmark Land Value of £5,300,000 • Residual Land Value of £2,990,000

3.6 With the former exceeding the latter, JLL have concluded that the scheme is not viable in its current

form assuming 14% affordable housing, CIL payments, Social Housing Relief and a nil S106

contribution. However the Applicant is keen to bring the development forward despite the viability

concerns and willing to accept the lower profit that this entails.



3.7 Given that the calculations are being made well in advance of commencement of the development,

the figures used in the applicant’s appraisal can only be recognised as a projection. As such, it is

essential that all assumptions are carefully scrutinised by the Council to ensure that they reflect

current market conditions and have not been unreasonably depressed in respect of the value or

overestimated in respect of the development costs.

3.8 It is also important to carefully scrutinise the applicant’s methodology. In particular the measure of

benchmark land value has a fundamental effect on the viability equation.

3.9 GL Hearn’s approach has been to critically examine all of the assumptions on which the appraisals

are based and conclusions reached.

Benchmark Land Values

3.10 From the outset of the review it is important to address the area of Benchmark Land Value (BLV).

3.11 Arriving at an appropriate BLV is not a straightforward exercise and this is acknowledged at 3.4.6 of

the RICS Guidance Note which states that:

“The assessment of Site Value in these circumstances is not straightforward, but it will be, by definition, at a level at which a landowner would be willing to sell which is recognised by the NPPF.”

3.12 The BLV should reflect the Market Value along with an appropriate premium to incentivise the sale.

In terms of arriving at an appropriate Market Value regard should be had to existing use value,

alternative use value, market/transactional evidence (including the property itself if that has recently

been subject to a disposal/acquisition), and all material considerations including planning policy.

3.13 JLL have put forward a BLV based on an Alternative Use Value, which is derived from their residual

valuation methodology. In the viability report JLL have referred to the valuation undertaken by

Knight Frank in November 2014. Knight Frank has valued the site on two bases namely Current

Use Value and Alternative Use Value. Current Use Value reflects the current value of the property,

ignoring any prospect of development other than for the continuation or expansion of the current

use. Alternative Use Value considers that where an alternative use can be readily identified and

would generate a higher value than the current use and a purchaser in the market would acquire

the property for that alternate use, the value should be reported as such.

3.14 JLL have adopted Knight Frank’s Alternative Use Value valuation based an alternative commercial

scheme as the basis of their BLV.

3.15 We do not disagree with this approach but it is important that the assumptions underpinning the

land value are reviewed and analysed, which we have done below.



3.16 The AUV is based on a redevelopment scenario and the key development assumptions are as

follows;

• The redevelopment is based on a 50% site cover

• A mixed use commercial scheme comprising 29,454 sq ft of single storey warehousing

units (incorporating 10% office content) and 53,554 sq ft of two storey ‘hybrid’ units could

be accommodated.

3.17 It is of course implicit in this basis of analysis that planning consent for such a scheme would be

forthcoming. We have not identified any planning constraints which would prevent this but it is

something which should be considered by the Council.

3.18 The site is valued on the basis of the above development works being completed. This values the

completed commercial accommodation after deducting all of the costs of construction utilising the

residual method of valuation. The value assumptions are based on transactional evidence of

comparable properties in the nearby area.

3.19 In respect of the AUV, Knight Frank have provided relatively limited evidence of comparable

industrial lettings in the nearby area before arriving at their ERV for the subject property. The single

comparable provided at Clipper House, Unit 28 Mastmaker Road, comprises 5,100 sq ft of ground

and first floor accommodation and was let in June 2014 at £65,000 per annum which equates to

£12.75 psf. The lease term agreed was 25 years subject to a break in year 15 with 5 yearly rent

reviews.

3.20 The above property is located north of the River Thames and circa 2 miles from the subject site. We

would suggest that given its distance from the subject site the Clipper House comparable should be

considered relatively weak. Given this we have undertaken our own research identifying a number

of more local comparables to inform our opinion of the appropriate ERV, which are detailed below.

3.21 5 units are currently under construction to provide a total of 22,499 sq ft of light industrial space at

1-5 Surrey Canal Trade Park on Surrey Canal Road. We understand the smallest unit will provide

4,531 sq ft and the largest 6,775 sq ft. The units are currently available to let at a rate of £15 psf.

The terrace of units provides a good comparable for new space in the local area, although none of

the units have been let we are of the opinion that this sets the upper limit for achievable rents in the

area.

3.22 Unit C1, Six Bridges Trading Estate, Old Kent Road Jay Hawk Ltd has taken 8,633 sq ft of ground

and first floor industrial space within Unit C1 on a 10 year lease at a rent of £111,797.35 per annum



in January 2015. The rent achieved equates to £12.95 psf and the lease was subject to a 5 year

rent review with no option to break. This unit is located 1.9 miles to the west of the subject property

and provides further evidence of rental tone for good industrial accommodation in the local area.

3.23 Having considered Knight Frank’s evidence and our own research we are of the opinion that a

suggested rent of £12.65 psf does fall within an acceptable level of tolerance assuming the

redeveloped accommodation is of a good standard.

3.24 Similar to the lettings, comparable research has been sought by Knight Frank to inform an

appropriate market yield. They have assumed a yield of 6%. It is important to consider the wider

picture when considering transactional evidence. Specification, covenant strength and lease term

are some of the many factors that affect yields adopted. Knight Frank has put forward a number of

comparable transactions to support their adopted 6% yield. We detail our opinion of the most

relevant below;

3.25 Unit A & B, Stonelake Industrial Estate, Woolwich Road, Charlton, London provides two modern

industrial units built in 1999 totalling 57,030 sq ft. Both units are fully let and the total rent is

£458,750 per annum. The property was sold in August 2014 for £22.6 million. The deal represents

a net initial yield of 5.25%.

3.26 Birchmere Business Park, Thamesmead, London comprises four modern industrial units which

includes a Council Material Recycling facility situated in the south east. The units total 89,293 sq ft

and are fully let with a total passing rent of £413,396 per annum. The average unexpired term is 4.8

years and the property is currently available at £5.75 million reflecting a net initial yield of 6.8%.

3.27 Having considered the evidence put forward, we are of the opinion that the assumed 6% is

representative of the market conditions in the local area and therefore consider Knight Frank’s yield

assumption to be reasonable.

3.28 The other inputs adopted in the residual appraisal are a build cost figure of £70 psf in addition to a

demolition cost of £500,000, build cost contingency of 5% and professional fees of 12%. Whilst no

costplan is provided we do consider the unit build cost assumptions to be reasonable. The sales

cost fees stated are also in line with market norms. The timescales incorporate a pre-construction

period of 6 months and construction period of 9 months. The void period assumed is 3 months post

completion which is less than we would have normally assumed but this makes a minimal impact on

overall value.

3.29 The Alternative Use Value methodology used to establish the benchmark land value, adopting the

aforementioned assumptions, provides a value of £5,300,000. This figure was reported in the



Knight Frank valuation report dated 3 December 2014. We consider this valuation basis an

acceptable methodology and the figure stated to be reasonable for the purpose of establishing the

benchmark land value.

3.30 An alternative basis of valuation i.e. Current Use Valuation is also quoted within the Knight Frank

report. This produces a figure of £4,400,000. Given that it would generally be considered

reasonable to attach a premium of 10-30% to this valuation to reflect the risk of bringing forward a

development, this actually produces a fairly similar figure which supports our conclusion that the

quoted Benchmark Land Value of £5,300,000 is reasonable.



4 RESIDENTIAL

4.1 As outlined in section 2, the application scheme proposes 287 private apartments. We have

provided below a residential market overview before considering the specific assumptions adopted

by JLL.

Market Overview

4.2 The continued appetite for residential property comes against the ongoing shortage of new housing

stock in the UK. This has been especially evident in London, where both the fundamental lack of

supply of new homes and a lack of existing stock on the market have combined to deliver large

double-digit annual growth in prices in some areas.

4.3 The London housing market continues to perform stronger than the national average with

Nationwide reporting in Q2 2015 that the average London property had increased by 7.3% on the

year compared to 4.1% across the UK.

4.4 Land Registry reported annual growth of 8.3% in London for the year to July 2015 with the average

price of property in the capital now at £488,782.

4.5 In overall terms Lewisham once again appears to have performed strongly with Land Registry and

Nationwide reporting that the Borough has had annual growth of 10.4% and 9% for July 2015 (latest

available figures). A strong level of growth is expected to continue into 2016 with most

commentators forecasting growth of 7% throughout London.

Comparable Evidence Analysis

4.6 JLL refer to a number of comparable schemes within the Borough but make the point that in their

opinion the majority are located in superior locations when compared to the subject development.

The evidence provided is largely situated around Greenland Dock to the north (Marine Wharf West

& Yeoman’s Wharf) and within Lewisham town centre to the south (Renaissance & Portrait). As a

result, there is a wide range of sales values from the evidence provided ranging from £337 psf to

£750 psf.

4.7 From the evidence put forward by JLL they suggest that the Theatro Tower development to be the

most comparable scheme citing its similar location and proximity to transport links.

4.8 Below we provide commentary on the main comparable evidence put forward by JLL.



4.9 Theatro Tower is an eight storey Union Developments construction comprising 48 residential units

built in 2010. When the units were first released onto the market the average price achieved was

circa £500 psf. During 2013-14 there were a number of re-sales within the development achieving

prices in the region of £450-£500 psf. At the end of 2014 a 1 bedroom, fourth floor flat went under

offer at £335,000 equating to a capital value rate of £580 psf. JLL have provided two transactions in

October 2014 within Theatro Tower equating to capital values of £596 psf and £589 psf. We have

conducted our own comparable research and detail the below sales in the development.

Unit Type Price Size sq ft £ / psf Date sold

1 Bed £365,000 600 £608 May 2015

1 Bed £365,000 617 £591 June 2015

4.10 In addition to the above Foxtons have a 2 bed apartment in the same development currently on the

market for £525,000 comprising 759 sq ft of accommodation. The asking price equates to a capital

value of £691 psf. We understand the property has been on the market since February 2015 and

has obtained offers below this level but remains unsold.

4.11 Creekside Village West is a large residential development constructed by Telford Homes located

0.7 miles to the east of the subject site and is within close proximity to the Theatro Tower

development which is detailed as a strong comparable due to its nearby location. Many of the units

were originally sold off-plan, but on completion in June 2012 1 bedroom units were being marketed

at circa £550 psf with upper floors as high as £650 psf. 2 bedroom units were marketed between

£460 psf to £500 psf with upper floor flats between £550 psf and £565 psf. Three bedroom units at

£430 psf to £450 psf with upper floors at a higher rate of £500 psf to £550 psf. We are of the

opinion that the units are of a higher standard of specification compared to the subject property and

would therefore achieve better values.

4.12 There have been a number of re-sales within the development at Adagio Point which we detail

below which were sold in May 2015;

Unit Type Floor Size sq ft Price £ / psf

2 Bed 2 715 £467,000 £653

2 Bed 5 715 £475,000 £664 2 Bed 7 715 £475,000 £664

4.13 Central Park, Lewisham Road is a phased re-development of the Heathside and Lethbridge

Housing Estates by Family Mosaic to provide 1,192 units. The estate is located 1.4 miles to the

south east of the subject site. The housing estate currently forms of 595 flats and maisonettes in a

number of blocks dating from the 1950s and 1960s. Family Mosaic has now sold all of the 1

bedroom units in the third phase of the redevelopment. Since their release in November there have



been 24 units either reserved or sold which equates to a sales rate of 2.4 per month. We detail a

number of the sales below;

Flat Unit Type Floor Size sq ft Price Date £ / psf 9 1 Bed 1 538 £313,500 March 15 £582

4 2 Bed 1 778 £438,000 June 15 £562

118 1 Bed 4 540 £329,500 March 15 £610

22 2 Bed 5 794 £458,000 Sept 15 £577

163 3 Bed 13 1,215 £680,000 July 15 £559

4.14 The Distillery, Seagar Place is a Galliard Homes development of 310 apartments located adjacent

to Deptford Bridge DLR Station. The development comprises two elements, a 26 storey tower

comprising 115 private units, and a crescent shaped building rising from 5 to 11 storeys providing

99 private units. The accommodation within the development is of a very good specification with

oak veneer flooring and doors, fully integrated appliances in the kitchen, granite worktops and en-

suite shower rooms to the master bedrooms. Each block has two lifts and all flats have access to

roof-top gardens. Some recent sales of the new build units within this development are detailed

below:

• Flat 2301 Distillery Tower - a 1 bedroom flat of 452 sq ft located on the twenty third floor

of the distillery tower sold for £291,299 in March 2015. The purchase price equates to £644

psf.

• Flat 1501 Distillery Tower - a 1 bedroom flat of 452 sq ft located on the fifteenth floor of

the distillery tower building sold for £260,000 completing in March 2015. The purchase price

equates to £575 psf.

• Flat 2501 Distillery Tower - a 2 bedroom flat of 818 sq ft located on the twenty fifth floor of

the distillery tower building sold for £485,000 completing in April 2015. The purchase price

equates to £592 psf.

• The Crescent - A 3 bedroom flat of 812 sq ft located on the seventh floor of the Crescent

building sold for £540,000 in August 2015. The purchase price equates to £665 psf.

4.15 We are also aware of two units currently on the market; a 3 bedroom flat on the eighth floor

comprising 845 sq ft of accommodation with an asking price equating to £639 psf and a 2 bedroom

flat on the eighth floor available for £495,000 comprising 739 sq ft of accommodation which equates

to a capital value rate of £670 psf.



4.16 Greenland Place, Cannon Wharf is a Barratt development comprising 562 apartments and 16 town

houses and is situated 1.3 miles to the north west of the subject site. This mixed use development

comprises a 23 storey residential tower and 68,500 sq ft of flexible commercial space being

delivered in a number of phases. The development is located within an area that is experiencing a

large amount of regeneration with a number of developments taking place within close proximity.

After discussions with the agent we have been informed of the following achieved prices within the

development;

• 1 bedroom apartments achieving prices between £340,000 to £390,000 and ranging in sizes

between 547 sq ft and 584 sq ft equating to a capital value range of £621 psf to £668 psf.

• 2 bedroom apartments achieving prices between £500,000 to £575,000 and ranging in sizes

between 794 sq ft and 891 sq ft equating to a capital value range of £630 psf and £645 psf.

4.17 The latest phase to be marketed is the Helsinki Court, third phase. We detail the following sales

transactions on the upper floors below;

Unit Type Floor Size sq ft Price £ / psf Date 1 Bed 16 577 £398,000 £690 July 15

2 Bed 17 1,007 £675,000 £670 June 15

4.18 These higher sales values are due to the high floor levels with units on these floors achieving

premium values compared to the lower floor equivalents, this is reflected by the higher £ / psf rate.

Detailed below are a number of the remaining units within the Helsinki Court phase on the market.

Flat Unit Type Floor Price Size sq ft £ / psf 409 1 Ground £365,000 547 £667

423 1 2 £375,000 547 £685

403 2 1 £511,000 794 £643

4.19 Batavia, Batavia Road, New Cross development comprises 101 private apartments consisting of 1,

2 and 3 bedroom units spread across a 5 storey and 10 storey block. Batavia is located 0.5 miles

south of the subject property and benefits from good transport links being located directly between

New Cross Gate and New Cross stations. The development is currently under construction and due

to complete in November 2015 and provides a good comparable given its close location to the

subject site however benefits from improved transport links. The site has yet to be brought forward

to the market but we have been advised of the following guide prices which we understand are the

lower floor level units, with the upper floors expected to achieve in excess of this.



4.20 We have considered the comparable evidence put forward above and we comment on the validity

of the assumptions made in respect of the chosen values for the proposed scheme in Section 6.

Unit Type Size sq ft Price £ / psf

1 Bed 515 £310,000 £601

2 Bed 667 £420,000 £630

3 Bed 878 £500,000 £569



5 COMMERCIAL

5.1 As outlined in section 2 the application scheme proposes the following commercial

accommodation;

Commercial Unit Floor Total GIA sq m Total GIA sq ft

Block A Ground/First Floor 245 2,637

B1 Ground 187 2,013

B3 First 1,380 14,854

B4 Ground 584 6,286

Block B Ground/First Floor 2,151 23,153

Block D Ground/First Floor 643 6,921

Total 3,039 32,711

5.2 The subject site is predominantly residential and is not within an established commercial area,

some distance from local transport. The site is also constrained as it is bounded on two sides by

railway lines and therefore does not benefit from passing traffic or significant footfall. Access to the

site is off Arklow Road and the nearest retail provision is at Deptford High Street which is located

0.4 miles to the east of the subject site consisting of a number of small independent retailers and a

mixture of café/fast food establishments.

5.3 The most prominent of the proposed commercial units are on the ground floors of Block B4 and

Block D which are situated in close proximity to the entrance of the site, providing better visibility off

Arklow Road. Blocks A and B1 are situated in the western part of the site and are much less

prominent. JLL point out the lack of prominence and the number of proposed residential units at the

subject site will certainly impact upon the demand for the commercial units.

Comparable Evidence Analysis

5.4 JLL have referred to a number of comparable market transactions within the surrounding area in

similar fringe locations to inform their assumptions in valuing the commercial element. Of the



evidence provided we attach a greater weight to the 47-75 Consort Road property given the

similarities to the subject site, location and immediate surroundings.

5.5 Unit 4, 47-75 Consort Road is situated close by in a predominantly residential area with similarly

limited footfall and was let in November 2014 to an Art Gallery. We understand the property

comprises 947 sq ft of flexible ground floor retail space with A1, A2 and B1 uses and fronts onto a

main road. The property was let at £11,000 per annum on a 20 year lease with 5 yearly break

clauses and rent reviews in November 2014. The rent agreed equates to £11.62 psf. The unit was

marketed at £12,500 per annum and we understand that a 125 year lease was also available at

£100,000. If we were to assume the available price the agreed rent shows a 10.7% net initial yield

having deducted purchaser costs.

5.6 We are unsure as to the level of rent agreed at the other two other units in the development but if

we consider the information from the particulars from November 2014, one unit (Units 1, 2 & 3)

comprised 1,722 sq ft and was available to let for £16,500 and the other unit (Units 5 & 6)

comprised 1,356 sq ft and was available to let for £15,000. If we were to assume a similar

percentage reduction on the quoting rent of 12% as seen for Unit 4, the adjusted rent for the Units 1,

2 & 3 amounts to £14,520 and £13,200 for Units 4 & 5. These rents would equate to £8.43 psf and

£9.73 psf respectively. This provides further evidence for the subject site given the comparable

nature of the development although these two have not been agreed.

5.7 Hughes Fields Community Centre, Deptford is referred to in the JLL submission as a comparable

letting in the area. Briefly the unit comprises a self-contained community hall with D1 use extending

to 5,597 sq ft. The space was let in October 2014 on a five year lease with a break option at the end

of year 3. The rent agreed was £60,000 per annum which equates to £10.72 psf. The property

occupies a similarly non-commercial location but provides a good standard of internal

accommodation.

5.8 There have been limited comparable transactions in the immediate area of similar property however

we detail below our own research ;

5.9 Block E, New Capital Quay, Greenwich High Road, London, SE10 comprises 18,000 sq ft of ground

and first floor retail space which was let in May 2012 to Pure Gym on a 15 year lease subject to a

rent review in year five and a tenant only option to break in year ten at a rent of £240,000 per

annum equating to £13.33 psf. The property benefits from being situated on Greenwich High Road

which benefits from a greater footfall and is equidistant from both Deptford Bridge and Greenwich

DLR stations. The accommodation is of a superior nature to the subject and therefore sets the

upper limit of rental tone in the area.



5.10 JLL refer to the lack of comparable investment transactions in the area given the early stages of

regeneration however have provided two transactions which we consider below;

5.11 Units 5 & 6 47-75 Consort Road mentioned above comprises 1,356 sq ft of retail space situated on

the ground floor. The unit was sold on a 125 year lease in December 2014 for £115,000. The price

agreed reflects a capital value of £85 psf.

5.12 Unit A, Clarson Court, 130 Gosterwood Street, London, SE8 is within a modern residential

development located at the western end of Gosterwood Street in Deptford. The immediate area is

residential in nature although there are nearby light industrial uses on Blackhorse Road. In July

2014, 2,185 sq ft of retail accommodation was purchased on a long lease for £226,500 equating to

£104 psf.

5.13 In addition to the above evidence we have conducted our own research and detail below a

comparable transaction.

5.14 One SE8, Washington Building, Blackheath Road, SE10 comprises a large, modern, mixed use

building located on the junction of Blackheath Road and Deals Gateway, close to Deptford Bridge

DLR Station. In January 2015 Unit 1, comprising of 3,659 sq ft of flexible commercial

accommodation (A3, B1, D1 and D2 use) within the Washington Building was purchased for

£385,000 equating to a capital value rate of £105 psf.

5.15 We have considered the comparable evidence put forward above and we comment on the validity

of the assumptions made in respect of the chosen values for the proposed scheme in section 6.



6 APPLICANT’S ASSUMPTIONS (INTERMEDIATE SCHEME)

6.1 In light of the evidence put forward by JLL and our own research, we are of the opinion that the

proposed blended average of £592 psf is reflective of the general sales value tone in the area given

the mix and form of development proposed.

6.2 We would highlight that it is clear that higher values are being achieved in the Deptford area but the

subject site has a number of disadvantages, particularly its position at the apex of two mainline

railway lines. With this in mind we are comfortable with the average sales value adopted, which in

our opinion reflects the site characteristics.

6.3 Having considered the comparable evidence provided by JLL and conducted our own market

research we consider the applied rental figure of £10 psf to be a reasonable assumption. Like JLL

we are also of the opinion that there are limited comparable investment transactions given the

market is not particularly well established. Therefore we have paid a greater degree of attention to

the freehold capital value rate from the few comparables available. These demonstrate a figure of

close to £100 psf which is the figure assumed for the proposed commercial element. Taking the

above into consideration we are of the opinion that the value attributed to the commercial

accommodation is reflective of the market in the local area.

Affordable Housing

6.4 The Borough’s affordable housing requirements are set out in the Core Strategy Policy 1 and

Section 3.1 of the Planning Obligations SPD, the Council requires 50% affordable housing from all

sources. Of this provision, 70% should be provided as rented tenure and 30% as intermediate

tenure.

6.5 However the Core Strategy also states that:

“where a site falls within an area which has existing high concentrations of social rented housing, the Council will seek for any affordable housing contribution to be provided in a way which assists in securing a more balanced social mix. This may include a higher percentage of intermediate housing or other arrangements as considered appropriate.”

6.6 LB Lewisham’s Planning Obligations SPD (February 2015) outlines the Council’s position on

Affordable Rents. LB Lewisham will not support schemes where all rents are set at 80% of Market

Rent. Instead, the Council seeks to set rent levels on a case by case basis, taking into account:

• maximising affordable housing output whilst complying with other Core Strategy policies; • meeting the full objectively assessed affordable housing needs; • ensuring provision remains affordable for future eligible households; and • the location within the borough, the area’s tenure mix and site characteristics.



6.7 JLL have indicated that they have given consideration to their opinion of affordable housing values

in the area but no further information has been provided in this respect.

6.8 Instead approaches have been made to three local RP’s and offers received (evidence has been

provided)

6.9 Given that the affordable housing values have been market tested and two of three offers result in

similar packages prices we are comfortable that the values adopted reflect current market levels

and therefore represent an appropriate basis for the viability assessment.

Residential Car parking

6.10 JLL have stated that a total of 16 disabled car parking spaces will be provided at ground level within

the development area. Due to the restrictive nature of the users for these types of spaces, they

have presumed a nil value on these units for viability.

6.11 Again we consider this to be a reasonable assumption and would not expect any value to be

achieved from disabled spaces.

Construction Costs

6.12 A budget Cost Estimate was prepared by Capita to inform the viability assessment. GL Hearn has

sub instructed quantity surveyors Johnson Associates (JA) to review this on behalf of the Council. In overall terms although there are points of difference between specific inputs JA are of the view

that the overall build costs are not unreasonable on a £ psf or a cost per unit basis.

Professional Fees

6.13 The costplan does not include professional fees. However, within the appraisal JLL have applied

professional costs of 10%. We would generally expect to see professional fees in the range of 8-

12%. With JLL’s assumption falling at the midpoint of this range we are comfortable that the

assumption can be considered reasonable

Marketing and Transactional fees

6.14 The following allowances have been made in JLL’s development appraisal:

• Marketing (Residential) - 1.50% of GDV of residential element • Marketing (Commercial) - 1.00% of GDV of commercial element • Letting Agent Fee - 10% of GDV • Letting Legal Fee - 5% of GDV • Sales Agent Fee - 1.75% of GDV



• Sales Legal Fee - 0.25% of GDV

6.15 Overall we consider these allowances to be in line with standard market practice.

Contingency

6.16 JLL have included a contingency sum within their construction costs. This includes a 3.5%

contingency on total construction costs. We consider this a reasonable figure for a scheme of this

nature.

Finance Costs

6.17 JLL have applied a finance debit rate 6.25%. Most developers are currently assuming an overall

debit rate of between 6-7% in appraisals for schemes of this nature and so we consider this a

reasonable assumption.

Planning Obligations

6.18 In respect of the S106 and Mayoral CIL JLL have relied on information provided by Turleys

Planning Consultants although detailed calculations have not been provided. Within the proposed

scheme JLL have made a total planning obligation allowance of £2,162,690 made up of the

following;

Borough CIL - £1,650,229

Mayoral CIL - £813,365

Total - £2,463,594

Less Social Housing Relief - £300,911

Total assuming within appraisal - £2,162,690

6.19 It has been assumed that the applicant has obtained Social Housing Relief on the basis of 14%

affordable housing which has been deducted from the overall planning obligation allowance. In the

event that the level of affordable housing changes, this will have an impact upon the level of relief

that is obtained and hence the overall planning obligations package.

6.20 JLL have stated that they have relied on the above. We have not undertaken our own assessment

of S106 / CIL liability and this will need to be verified by the Council’s CIL team.

Developers Profit



6.21 JLL’s viability assessment refers to the use of a profit margin of 17.5% on GDV for private housing

and 6% on GDV for the affordable housing proposed. However, on reviewing their financial model

we note that they have actually used a single developer’s profit target of 21.30% on costs or

17.53% on gross development value.

6.22 It is not unusual in exercises of this nature for a developer to propose a profit margin based on 20%

GDV for the private residential content with 6% on the affordable. This is sometimes treated as a

blended profit margin of 17.5% although with a relatively low affordable content the blended rate

should perhaps be slightly higher.

6.23 Whilst this 20%/6% is commonly accepted within a viability assessment there is an argument that in

some cases this can be considered slightly high given the current competitive market for

development land.

6.24 Thus whilst we do not consider the profit margin included within JLL’s modelling (as opposed to

their report) to be entirely unreasonably high, we have also considered the impact of bringing this in

line with their reported figures.

6.25 To do so we have calculated the reduction in profit which would arise from reducing the margin

applied to the affordable GDV from 17.53% to 6%.

6.26 As has been highlighted earlier in the report, the residual value of the scheme proposal is

significantly below the benchmark land value which would result from applying this reduced profit

margin to the affordable.

6.27 Accordingly whilst we consider that the figures set out in the JLL report are probably more reflective

of current market conditions, this does not ultimately have an impact on our overall conclusions.



7 ALTERNATIVE MASTERPLAN SCHEME

7.1 A second application has been submitted by Anthology Deptford Limited, which has been subject to

a separate viability assessment by JLL. This alternative scheme is referred to as the “Masterplan

Scheme”.

7.2 The primary difference of the Masterplan Scheme is that it includes a small parcel of land within

Network Rail’s ownership located to the west of the subject site. The inclusion of the additional

Network Rail Land facilitates a different design response, which we discuss in further detail below.

7.3 The total site area including the Network Rail Land extends to approximately 1.12 hectares (2.77

acres).

7.4 Under this scenario the Applicant is seeking to obtain planning permission for a mixed use

development consisting of the following;

“Hybrid planning application seeking 1) full planning permission for demolition of existing buildings

and construction of mixed use development in buildings ranging from 5 to 9 storeys comprising up

to 258 residential dwellings (Class C3), up to 2,869 flexible commercial floor space (Classes A1, A2,

A3, B1, D1 and D2), disabled vehicle and cycle parking, landscaping, access and other associated

works and 2) outline permission (to consider access, scale and layout) for the erection of a building

of up to 22 storeys comprising up to 58 dwellings and associated works”.

7.5 Common to the intermediate scheme, the uses will be accommodated within six blocks (Blocks A-F),

however the heights of the buildings vary between 5 and 22 storeys. Block A, which is the closet

building to the Network Rail land is the tallest building with two rows of lower level buildings to the

east of this building.

7.6 The residential content of the scheme comprises 316 private apartments including 40 affordable

units with disabled vehicle and cycle parking, landscaping and associated works. The affordable

provision in unit numbers is consistent between the two applications but the masterplan scheme

includes an additional 29 private units.

7.7 For ease of reference the table below provides a breakdown of the residential content of the

masterplan scheme indicating the split of bedrooms and total floorspace;

Residential Units Number of Units Total NIA () Total NIA (sq ft)



1 bedroom flat 154 8,145 87,670

2 bedroom flat 127 9,409 101,280

3 bedroom flat 35 3,347 36,027

Total 316 20,901 224,977

7.8 Included within the proposal is a flexible mix of A1/A2/A3/B1/D1/D2 space spread over the ground

and first floors. The table below details the proposed floor space for the commercial element.

Commercial Unit Situation Total GIA () Total GIA (sq ft)

B1 Ground 187 2,013

B3 First 1,380 14,854

B4 Ground 584 6,286

Block B Ground/First Floor 2,151 23,153

Block D Ground/First Floor 643 6,921

Total 2,794 30,074

7.9 As per the intermediate scheme sixteen disabled car parking spaces are proposed at ground floor

level. No value has been attributed to these given the restrictions upon the users of these spaces.

In addition commercial and residential cycle spaces and bin storage is also proposed.

Residential Values

7.10 The residential sales values vary between the intermediate and masterplan schemes. As per the

intermediate scheme a full schedule of unit values has also been provided.

7.11 Given the additional height of Block A within the Masterplan proposal more of the units are able to

command a premium due to their enhanced aspect, which results in the overall higher average

sales value.



7.12 As we have previously discussed, it is common place for a premium to be attached to higher floors

of developments and therefore we do not disagree with the approach adopted by JLL or indeed

their overall conclusions on Gross Development Value.

The total development programmes for both scenarios are the same assuming a period of 40

months which includes demolition, build and sales periods. It has been assumed however that 50%

of the private units will be sold on practical completion with the remaining units sold over the

following five months for both schemes.

Commercial Values

7.13 In respect of the commercial element of the scheme the Masterplan scheme has a marginally

smaller commercial content than the intermediate scheme as illustrated below;

• Intermediate scheme commercial space – 32,712 sq. ft.

• Masterplan scheme commercial space – 30,075 sq. ft.

7.14 Accordingly, as is the case with the Intermediate scheme, we consider that the cost and value

assumptions adopted by JLL in their appraisal are reasonable and reflective of market conditions

and therefore we accept their residual value as a reasonable valuation of the proposed masterplan

scheme.

7.15 (We referred at 6.31 and following to disparities between JLL profit assumptions set out in the

report and those actually used in their modelling. These comments also apply to the Masterplan

modelling. Again we have calculated reduced profit by applying 6% GDV to affordable content and

this produces a saving – again insufficient to increase residual value to the level of the benchmark).

Benchmark Land Value

7.16 Clearly one of the key differences between the two schemes is the inclusion of the Network Rail

land. As mentioned above the Masterplan scheme includes this section of land owned by Network

Rail which has been incorporated in order to create a link from Arklow Road to Rolt Street. This is

located immediately to the west of the subject site, which would facilitate pedestrian flow through

the site to the surrounding area.

7.17 Within the viability report JLL included a cost which they have indicated is the sum Anthology has

already agreed to pay Network Rail for an easement over their land. We have not been provided

with any correspondence between the applicant and Network Rail and we would suggest further

information is requested in this respect.



7.18 Rather than amending their benchmark value to reflect the cost of the land, JLL have left this at

£5.3m and treated the Network Rail acquisition as a ‘development cost’ within their assessment of

value of the Masterplan Scheme.

7.19 The fact that the inclusion of this acquisition cost still produces in an increase to residual value of

the scheme suggests that Anthology are not overpaying for the Network Rail land and therefore it is

entirely reasonable to treat this as a development cost within the viability assessment.

7.20 Whilst no evidence of this figure has been put forward, it is relevant to note that this is leading to a

residual value of £3.6m in comparison with a BLV of £5.3m. Even if they were actually paying only

£1 for the Network Rail land, the residual value of the scheme would still fall short of the viability

benchmark. That being the case, whilst it is reasonable for the Council to seek verification of the

terms of the Network Rail acquisition, we would not expect this to have a material effect on our

conclusions.



8 VIABILITY SUMMARY

8.1 Usually our approach for these type of instructions would be to recreate the Applicant’s viability

model. However, in this instance JLL provided an electronic version of their Argus appraisals for

both the Intermediate and Masterplan schemes.

8.2 We have therefore interrogated their viability model in detail to ensure that the appraisal set up and

assumptions adopted are consistent with those stated in their viability report. Having done this we

are satisfied that the development appraisals and modelling are correct and are consistent with the

approach outlined in the respective affordable housing viability assessment reports.

8.3 The Benchmark Land Value is based on an assessment of Alternative Use Value and we do not

take exception to the approach adopted or the suggested BLV of £5,300,000, which has been

adopted for both the intermediate and masterplan schemes.

8.4 We have undertaken a detailed review of all development assumptions for both schemes and we

are comfortable that the assumptions adopted are reflective of the current market. In respect of

construction costs Johnson Associates have highlighted a number of cost items which in their view

have been overestimated or not fully justified but equally in their opinion some cost items can be

considered conservative. In overall terms Johnson Associates concluded that on £ per sq ft basis

the construction costs adopted were not unreasonable.

8.5 In light of the above it is our opinion that the viability conclusions reached by JLL are reasonable for

both of the scenarios. For ease of reference a summary of JLL conclusions for both schemes is set

out below:-

Intermediate Scheme Viability Conclusion

8.6 In respect of the Intermediate scheme JLL have concluded that assuming a 14% affordable housing

provision by unit number (40 units) and financial contributions for Mayoral CIL and Borough CIL

equating to £2,162,000 the scheme results in a residual land value £2,990,000. When considered

against the site benchmark value of £5,300,000 there is project deficit of circa -£2,310,000. Despite

this deficit the JLL have indicated that the Applicant is committed to ensuring the scheme comes

forward for development on the basis of 14% affordable housing by unit number.

Masterplan Scheme Viability Conclusion

8.7 In respect of the Masterplan scheme JLL have concluded that assuming a 13% affordable housing

provision by unit number (40 units) and financial contributions for Mayoral CIL and Borough CIL



equating to £2,430,000 the scheme results in a residual land value £3,600,000. When considered

against the site benchmark value of £5,300,000 there is project deficit of circa -£1,700,000. Despite

this deficit the JLL have indicated that the Applicant is committed to ensuring the scheme comes

forward for development on the basis of 13% affordable housing by unit number.

Date post:	20-Sep-2020
Category:	Documents
Upload:	others
View:	0 times
Download:	0 times

Arklow Road Trading Estate, Deptford, London, SE14 6EB … · London, SE14 6EB, September 2015...

Documents