Issue 2 Are the charging rates informed by and consistent with the evidence?

Transcription

1 LONDON BOROUGH OF ISLINGTON COMMUNITY INFRASTRUCTURE LEVY [CIL] CHARGING SCHEDULE EXAMINATION EXAMINER S ISSUES & QUESTIONS London Borough of Islington Response to Examiner s Issues & Comments Issue 2 Are the charging rates informed by and consistent with the evidence?

2 Table of Contents Issue 2 Are the charging rates informed by and consistent with the evidence?... 1 Appendix 1 Update and comparison of office rents... 11

3 2.1 In general terms, is the definition of the two charging areas robustly supported by economic viability evidence? The charging zone boundary is based on London s Central Activities Zone boundary which is established in the London Plan 1 and covers London s geographic, economic and administrative core. The CAZ serves a strategic economic function for London, with almost a third of London s jobs located within its boundary. The central location, high transport accessibility and concentration of uses within the CAZ which support London s function as a global city, underpin the development viability in this location Islington s section of the CAZ achieves the highest development values in the borough 2 and also the largest concentration of development which is a demonstration of viability in this part of the borough. The Islington Core Strategy (2011) indicates that this trend is expected to continue over the plan period Values in the south of the borough have been increasing rapidly, due to the expansion of Central London development market to fringe areas and in part to large scale investment in the Kings Cross area, the forthcoming Crossrail Station at Farringdon and the impact of Tech City in the Old Street area. 3 Has sufficiently fine-grained sampling of development sites taken place? Yes, 101 sites have been identified for development within the adopted Site Allocations (17) and Finsbury Local Plan (16). Forty-five of these sites have a current planning permission, are in the process of an application for planning permission, or otherwise are identified for infrastructure and so are unlikely to be charged CIL. The CIL Viability Study (23) and the Additional Hotel Viability Testing (24) together test 29 sites which amounts to more than half of potentially chargeable sites identified in the Development Plan These sites have been chosen carefully to reflect the criteria set out in CIL Guidance (April 2013) and to ensure they are representative of sites in the Development Plan 4. These sites have been tested in addition to many other sites and development scenarios tested in the other viability reports which also form part of the evidence base. 1 London Plan Map See 2.2 for further details. 3 This is well documented in the council s viability evidence, market research reports and articles. Please see Appendix 1, Draft Charging Schedule (1) Appendix 2, the Draft Charging Schedule Statement of Consultation. 4 Please see CIL Viability Study (June 2013, Appendix 2) for further information. 1

4 2.1.6 A number of sites have been tested that fall within the part of the borough within London s CAZ (Area A), where the largest concentration of development in Islington is expected, as well as throughout the rest of the borough (Area B). Has a sufficient amount of market and sensitivity testing taken place? The council has relied on a range of appropriate available evidence including market assessments, development trends, values of different land uses and the findings comprised in a number viability assessments, as well as the Local Plan and its evidence base The council has undertaken two statutory consultations on proposed rates inviting over 3,000 parties to submit representations. The council undertook an additional non-statutory consultation in February/ March 2013, inviting major landowners, developers and agents to meet with the council and submit viability evidence relevant to CIL. The council has taken into account comments received when setting rates within the Draft Charging Schedule A range of sensitivity testing has been undertaken within the viability assessments to inform the rate setting process and ensure that rates are not set at the margins of viability. For example, the viability of development has been tested with: different CIL rates 6 ; the Islington and Mayoral CIL charged on net additional floorspace, and on all new floorspace; differing development values and costs; and with other requirements varied. 2.2 Are the differential charging rates soundly based on evidence of differential values in the two charging areas? As noted above, the highest development values are achieved within the south of the borough within the part of Islington within London s Central Activities Zone. The CIL Viability Study (23) identifies that the highest residential values occur in the south of the borough, with lower values elsewhere 7. The council undertook research of residential prices in Islington in June 2013 that also highlights that higher values are prevalent in the south of the borough 8. 5 Please see Submission Documents 23-30, DCS Appendix 2 and references to market reports in the DCS Consultation Statement and in the council s Statements of Issues 1, 2 and 3. 6 Please see Combined Policy Viability Study (25) Paragraph 4.23, CIL Viability Study (23), Table and Study of Financial Viability of Student Accommodation (29), Table 6B. 7 This trend has been established for a number years. For example, the Islington Local Housing Needs Assessment (2008) identifies a definite north/south divide for postcode price data, with areas in the south of the borough generally the highest priced (p. 3). 8 Please see Draft Charging Schedule Appendix 2, p72. 2

5 2.2.2 The south of the borough also commands higher office rents. Currently average rents in the south, are identified as 390 per sq m. 9 Conversely, office rents in the mid/north of the borough are on average around 150 per sq m Retail values are also highest in the south, particularly in Angel Town Centre. From a review of current market retail rents, typical rents are 430 per sq m in Area A (Clerkenwell and Angel) and 290 per sq m in Area B (Archway, Finsbury, Nags Head/Upper Holloway Road) The CIL Viability Study (23) and Additional Hotel Viability Testing (24) identify that there are higher hotel capital values in the CAZ compared with other parts of the borough based on rental data and transactions of hotels. A review of hotel room rates also indicates a significant variation with average rates of 183 per night within eight hotels in the CAZ and 115 per night within four hotels within the rest of the borough The proposed differential charging rates reflect the variations in values that are achieved by these uses within the south of the borough in the London s CAZ (Area A) compared with other parts of the borough (Area B). Residential 2.3 Is the student accommodation charging rate soundly based on evidence of rental levels for this use across the Borough? Does this rate take account of other contributions required from this form of development? The Study of Financial Viability of Student Accommodation (2012) applies rental values which are based on a review of rents for student accommodation in Islington. 11 The review showed that rents are extremely high in Islington; and, for student accommodation completed since 2008, the average weekly rent was 268. However, much lower rents have been tested and these have been used as the basis for setting the CIL rates. This is one of a number of factors ensuring that the rates have not been set at the margin of viability for the vast majority of sites and also allows for variations in rents and site-specific matters Notwithstanding this, market reports indicate that demand for student accommodation in London is likely to remain strong. Unite have identified continued growth in international 9 Jones Lang LaSalle (Q3 2013) On: Point Central London Market. This relates to the area known as the Northern City Fringe which incorporates the majority of the part of Islington within the CAZ (south of the City and Pentonville Roads). 10 The Workspace Viability Report (2011). Rents within this report are no longer up to date, however at the time of publication there were marked differences in office rents between the south and north of the borough. 11 See Table 1 in the Study of Financial Viability of Student Accommodation, Please see also Statement to Issue I, response to Question 1.3, Paragraph

6 student demand and a supply/ demand imbalance which is most acute in London, high occupancy levels and rental growth 13. Savills also identify increased student numbers, strong international demand, a shortfall in suitable accommodation and project rental growth of 3% within the UK market in 2013/ The Core Strategy restricts new student accommodation to City University and London Metropolitan University campus areas which is likely to increase the value of new sites that do come forward in these locations The Study of Financial Viability of Student Accommodation in Islington (2012) takes account of the Mayoral CIL, the student accommodation bursary as well as a charge to reflect any S106 costs that would not be addressed by CIL. The study concludes that there is scope for developers to make significant financial contributions through CIL and student bursaries and that the majority of student accommodation schemes would be able to pay CIL contributions of 450 per sq m 16 and an annual student bursary of 500 per unit over 30 years. The council intends to set a lower CIL rate of 400 per sq m and much lower bursary charge which varies according to the rent achieved in the development Unite Factsheet The UK s leading provider of student accommodation for over 20 years The council have undertaken a review of the rents charged in the eight Unite student accommodation blocks in Islington which indicates that average advertised rents increased from 265 per week in August 2012 to 287 per week in September Savills, Spotlight Student Housing, July CIL Viability Study, The study states that 500 per sq m could viably be supported which includes the Mayor of London s CIL of 50 per sq m. 17 The student bursary charge is based on rents achieved by a development each year. This flexibility will ensure that the bursary is appropriate for each site and is responsive to changes in rents, with a lower charge applied for schemes achieving lower rents. For example for developments achieving rents of 220 per week, the annual bursary would be 269 per room; for rents of 270 per week the annual bursary would be 330 per room; for rents of 320 per week, the annual bursary would be 391 per room. 4

7 Commercial Development 2.4 Are the Viability Study Update s appraisals in respect of commercial development robust and consistent with the evidence? Specifically: (a) are the charging rates for retail development supported by robust assessments of the economic viability of this use? The CIL Viability Study (23) tests 15 sites across Islington that incorporate retail floorspace. This is a significant sample given that no sites are allocated solely for retail development in the Local Plan and that opportunities for new retail development are relatively limited due to site constraints within town centres. The majority of the 15 retail sites tested were viable (11) and only 1 site became unviable when CIL was introduced. In this instance, the main issue affecting viability was the high proportion of office floorspace within the development. However it should be noted that a review of office rents indicates that current values are higher than those assumed in the study Due to the density of development in Islington and site constraints, many retail sites will involve the conversion of existing floorspace which would be deducted from the chargeable area, reducing the CIL charge. (b) are the charging rates for hotel development supported by robust assessments of the economic viability of this use? The Report on CIL Viability Assessment Studies (DVS, 2012) found that a rate of 450 per sq m could be supported by most hotel developments. This is significantly higher than the proposed hotel rates set out in the Draft Charging Schedule ( 350 in Area A and 250 in Area B) The CIL Viability Study (2013) and the Additional Hotel Viability Testing (2013) test a total of eight sites that include hotel floorspace. This is a comprehensive assessment of economic viability given that there are fewer sites than this identified specifically for hotel development in the Local Plan. New hotel developments granted permission after the introduction of CIL are not expected to account for a significant proportion of total new floorspace over the plan period. 18 See Appendix 1. 5

8 2.4.5 The Additional Hotel Viability Testing undertook appraisals for budget and luxury hotel models. The report found that 15 out of the 20 scenarios tested (with CIL applied on net additional and all floorspace) were viable and concluded that the proposed hotel rates can be absorbed without adversely impacting on viability. Inspector s Note: the Council is requested to specifically comment on the development appraisals submitted by Jones Lang LaSalle for Whitbread [ref. DSC912] Jones Lang LaSalle have provided two appraisals of hotel sites one for a proposed site at Hamlyn House in Archway, and one at Old Street The council is currently dealing with an application for a change of use from offices to hotel use at Hamlyn House. Jones Lang LaSalle have applied both the Islington CIL and Mayoral CIL to 100% of the floorspace in their appraisals. The council has however assessed the current application for mayoral CIL liability as Collecting Authority for the Mayor of London s CIL and has determined that this would be zero as no new floorspace is being created Mayoral CIL is calculated in the same way as the borough CIL and so if this application were determined after adoption of the Islington CIL, the liability for this would also be zero. CIL will therefore not affect the viability of this development Budget hotel providers actively seek sites with existing buildings that can be converted, typically from existing hotels or underused office space. In these cases the level of CIL due is likely to be low or zero Two appraisals have been provided showing with and without CIL scenarios. No benchmark land value indicating a required return to the land owner has been provided and so it is not possible to tell whether the scenario with CIL applied (on 100% of floorspace) is viable or not. Given that the existing site comprises outdated office accommodation that has been substantially vacant for a number of years (the reason for the change of use) it is likely that the site has a relatively low existing use value increasing the likelihood that the scheme is viable. Even if CIL were charged at this level, it has not been demonstrated that the hotel would not be viable It is considered that the Old Street appraisals relate to a development within the London Borough of Hackney consisting of a hotel (251 rooms) student accommodation (673 suites) and office floorspace (6520 sq m). Planning permission was granted in 2009 and then revised in 2010 and this development has now been completed. 6

9 Again the appraisal assumes that the Mayoral and Islington CIL would be applied on 100% of hotel floorspace. The site was however partly occupied at the point of permission and so if CIL did apply at this time, the charges would have been lower than that stated. For a scheme of this nature the Mayoral planning obligations Crossrail top up charge would not apply because this would be lower than the Mayoral CIL and the charge based on the existing office use Again, no benchmark land value has been provided and so it is also not possible to tell whether the development is viable or not. Prior to development the site comprised of offices which were under occupied and in need of refurbishment as well as light industry, storage and a car park. Given the use and condition of the site it is likely that this site also had a relatively low existing use value. If CIL were to apply, even if charged on 100% of floorspace, the scheme may well be viable, although it is not possible to determine viability without a viability benchmark The appraisals do not therefore show that the developments are unviable and do not demonstrate that the proposed CIL rates would impact adversely on the delivery of hotel development in Islington or delivery of the Development Plan. (c) are the charging rates for office development supported by robust assessments of the economic viability of this use? The CIL Viability Study, Report on Viability Assessments and Workspace Viability Report assess the viability of office development. The office charging rates are based on economic viability evidence that indicates that office development is generally less viable than student, hotel, residential and retail uses and so lower rates are proposed for offices There is a marked variation between office rents that can be achieved which are much higher in the south of the borough which is adjacent to the City of London, compared with the rest of the borough. Lower rents outside of the CAZ have a detrimental impact on viability and so a nil office rate is proposed here The Report on CIL Viability Assessment Studies (2012) concluded that a rate of 150 per sq m in the CAZ would amount to a small proportion of development costs and, would not put development at risk. However, the council has subsequently lowered its rate for Area A to 19 See Mayor of London s Crossrail Supplementary Planning Guidance 7

10 80 per sq m, which is at a level lower than current S106 infrastructure charges ( 105 per sq m) A review of current office rents shows that rental values within the south of the borough 21 have increased rapidly than in the last two years - by more than 25% between 2011 and Current average office rents are higher than those applied within the Combined Policy Viability Study (25) and the CIL Viability Study (23) (See Appendix 1) The significant improvement in the office market in the south of the borough confirms that the council has taken a cautious approach in lowering its proposed office rate in Area A. In all cases, has sufficient assessment been made of single-use (as opposed to mixed-use) developments in the Borough? The majority of development in Islington comes forward as part of mixed use developments. However, single-use residential sites have been tested in the CIL Viability Study (RD 23), the Affordable Housing Sub-Threshold Contributions Study (RD 27) and the Affordable Housing Viability Assessment (RD 28). Single-use hotel developments were tested in the CIL Viability Study and Additional Hotel Viability Testing. Student accommodation single-use sites were tested in the Study of Financial Viability of Student accommodation in Islington report. Single-use office sites were tested in the Workspace Viability Report and office led developments (incorporating a small proportion of retail floorspace) were tested in the CIL Viability Study A total of 15 sites that contain retail floorspace have been tested in the CIL Viability Report. No single retail use site has been tested which reflects the fact that no sites have been allocated as single-use retail sites within the Local Plan. 20 See comparison between CIL and S106 charges on p81 of the Draft Charging Schedule and Supporting Information Document for office developments in the CAZ. 21 This relates to the area known as the Northern City Fringe which incorporates the majority of the part of Islington within the CAZ (south of the City and Pentonville Roads). 22 See Appendix 1. The potential for growth in values in Area A is also well documented in a number of market research reports and articles referred in Appendix 2 of the Draft Charging Schedule (1). 8

11 Other 2.5 Is it clear how the sui generis charging rate has been derived and what actual development types this rate would apply to? The sui generis rate has been derived based on advice from DVS that a charge of 80 per sq m would not be likely to have a determining impact on the viability of sui generis uses 23. DVS advised that sui generis uses such as night clubs, members clubs, amusement centres and petrol stations are often built by owner occupiers for a specific operational function or on a pre-let basis which improves viability. The CIL Viability Study (23) also concludes that the proposed rate is of minimal significance when determining viability Following consultation on the Preliminary Draft Charging Schedule, the council has proposed a nil rate for certain uses that would normally fall under the sui generis use class. These relate to emergency service facilities, waste infrastructure and water and waste water infrastructure, and the list of these uses is within the Draft Charging Schedule Islington development monitoring data shows that the majority of sui generis applications are for changes of use of individual retail units. Most of these applications consist of less than 100 sq m floorspace and are conversions with no new floorspace and so would not be charged CIL. Where an increase in floorspace is proposed, the rate is lower than the proposed retail rates reflecting that retail uses are expected to be more viable. From a review of applications involving sui generic floorspace between , it is evident that very few sui generis sites do incorporate net additional floorspace and most would therefore not be CIL liable It is expected that the rate is only likely to apply to uses such as nightclubs, private members clubs or amusement centres where there is an increase in floorspace. Does the evidence base justify a charge on all likely sui generis uses? Very few developments that incorporate net additional floorspace include sui generis uses and for the reasons referred to above the sui generis CIL rate is not likely to apply in many cases. Even where there is an increase in floorspace, in most cases this is expected to account for a small proportion of new floorspace and so the charge would not be significant. 23 Report on CIL Viability Assessments (26) 24 See page 44. 9

12 2.5.6 DVS and BNP Paribas identify that the proposed sui generis charge is not likely to have a determining impact on viability 25. Based on appropriate available evidence in line with Paragraph 25 of the CIL Guidance (April 2013), the council considers that a low rate of 80 per sq m applied on relatively few developments that are likely to involve increases in sui generis floorspace is appropriate. This will not put the Development Plan as risk, but will help to address impacts on infrastructure associated with these uses. 25 Report on CIL Viability Assessments (26) and CIL Viability Study (23) 10

13 1.0 Appendix 1: Update and Comparison of Office Rents 1.1 A marked improvement in the Central London office market has been identified with increased office 'take up', increased rents, and lower yields in Quarter Investor demand continues to be strong with increased interest in fringe locations. 1.2 During the same period, GVA report that the City Fringe saw the highest proportion of office take up at 42%. The Technology Media Telecommunications (TMT) sector is underpinning rents in the City Fringes and record rents are being achieved in a number of locations including Clerkenwell Recent market reports indicate that office rents in the south of Islington have increased significantly in the last 2 years. The Northern City Fringe market is defined by Jones Lang LaSalle and GVA as encompassing all of the area to the south of Pentonville Road and City Road. This part of the City Fringe experienced an average increase in rents of 9.8% 28 over the last year and a 15.9% annual change in between 2011 and 2012, putting total growth at 25.7%. 29 Office Rents in the Northern City Fringe ( per sq m) Period Max Min Average % annual change (average) Q Q Q Total Growth 25.7% : Source: Jones Lang LaSalle (Q3 2013) On Point: The Central London Market Rents have been converted to /sq m in accordance with the Inspector s Guidance Notes 1.4 Jones Lang LaSalle identifies that average office rents in the Northern City Fringe are currently 390 per sq m (see table above) 30. The prices used to generate this average relate to all offices and not specifically new stock which would typically attract higher rents. 1.5 Both Jones Lang LaSalle and GVA report that prime office rents in the Northern City Fringe can command in the region of 500 per sq m. 31 In Clerkenwell, office space can achieve up 26 Jones Lang LaSalle (Q3 2013) On Point: The Central London Market 27 GVA (Q3 2013) Central London Office Analysis p7. 28 Jones Lang LaSalle (Q3 2013) On Point: The Central London Market, p Jones Lang LaSalle (Q4 2012) The Central London Market 30 Up to date market rental prices are not currently available for the mid and north of the borough. 11

14 to 538 per sq m. Additional market data indicates that current average office rents for existing stock in Kings Cross, Clerkenwell and Silicon Roundabout are 355, 409 and 431 per sq m respectively These rental values are notably higher than the figures applied in the Combined Policy Viability Study and the CIL Viability Study. Reviewing the current average office rental price of c. 390 per sq m for the Northern City Fringe (see Table above) against the average value applied in these studies for sites in the CAZ ( 281 per sq m) indicates that recent rental growth may not have been fully captured the studies. 1.7 Jones Lang LaSalle also report that there is evidence that yields have reduced in the Northern Fringe and, investors are increasingly buying in anticipation of rental uplift which will drive further value growth. This has resulted in a narrowing margin between yields in core and fringe sub-markets GVA (Q3 2013) Central London Office Analysis & Jones Lang LaSalle (Q3 2013) On Point: The Central London Market 32 November Jones Lang LaSalle (Q3 2013) On Point: The Central London Market 12