Developer return assumptions by tenure in an appraisal

A developer profit assumption viability argument is won or lost on two numbers: the percentage, and what it is a percentage of. National planning practice guidance works from a return of 15 to 20 per cent of gross development value for plan making, and accepts that a lower figure may suit affordable housing because the end sale is agreed in advance and the risk is smaller. Those two sentences cover most of the ground. The disputes come from how the figure is applied, split and evidenced.

Authorities now employ reviewers who do this for a living. An appraisal that applies one blended return across every tenure invites the obvious question, and the obvious question is usually the expensive one.

Why return is assessed by tenure

Market housing carries sales risk. The developer builds, then finds a buyer at a price nobody can be certain of two years out, and carries the cost of holding unsold stock.

Affordable housing, delivered to a registered provider under a pre-agreed contract, carries almost none of that. The price is fixed, the buyer is identified, and the payment schedule is known at the point the contract is signed. Guidance recognises that reduced risk and expects the return on that element to reflect it.

Commercial floorspace sits somewhere else again, with letting risk, incentive packages and a yield that moves with the investment market rather than with house prices. Treating it as though it behaved like flats for sale produces a number that nobody with an investment background will accept.

So the starting discipline is simple. Split the appraisal by tenure, apply a return to each, and say in one paragraph why each figure differs from the others.

Profit on cost and profit on value

The two conventions are not interchangeable, and the gap between them widens as margins rise.

A 17.5 per cent return on gross development value on a scheme where land is a third of the cost base is a materially different number from 17.5 per cent on cost. State which basis each figure uses, in the cell or the row heading, and give the arithmetic so a reviewer can convert between them without rebuilding the model.

The commonest error in submitted appraisals is a single table where some rows are on cost and others on value with nothing to say which is which.

The ranges national guidance works from

For plan making, the guidance range is 15 to 20 per cent of gross development value, and it is framed as what may be considered suitable rather than as a cap or a floor. Two qualifications matter.

It is written for plan making, where the point is to test whether a policy is deliverable across a notional site. On a decision-taking appraisal for one real scheme, the guidance expects the return to be justified by the circumstances of that scheme, which can take it outside the range in either direction.

And it applies to the market element. The lower figure for affordable housing is left to be evidenced rather than prescribed, which is why practice converges on a conventional range rather than a stated number. If you adopt a figure, say where it comes from: comparable schemes in the authority, the registered provider's own terms, or the funding structure of this particular deal.

Where you depart from the guidance range on the market element, the justification has to be specific to the site. Ground conditions, a phased delivery over six years, a single-staircase redesign, an abnormal remediation liability. Generic references to market uncertainty get struck out by reviewers, and rightly.

Risk, scale and phasing

Scale cuts both ways. A 400 unit scheme spreads fixed costs and gives the developer the option to slow delivery, which reduces risk. It also extends the exposure period and increases the sum at stake, which increases it.

The honest position is that scale changes the shape of the risk rather than its size, and the appraisal should show where that lands. A long phased scheme carries more interest cost and more exposure to a market cycle, and the usual way to reflect that is through the finance assumption and the phasing of receipts rather than by inflating the profit percentage. Reviewers watch for risk being counted twice, once in a contingency, once in a finance rate and once again in the return.

Pick the line where each risk sits and keep it there. A 5 per cent contingency on build cost plus a 20 per cent return plus a nine month sales void on every unit is three charges for the same uncertainty, and an independent reviewer will say so. Our note on the independent review of a viability appraisal sets out how that exercise usually proceeds.

Build to rent and investment value

Build to rent breaks the appraisal in a useful way. There is no sales programme, so there is no sales risk to price, and the exit is an investment value derived from net operating income and a yield rather than from unit sales.

Three consequences follow. Return is normally expressed on cost rather than on value, because gross development value in the sale sense does not exist. The yield assumption does more work than the profit assumption, and a 25 basis point movement in it will shift viability further than any plausible argument about profit. And the operating cost deduction, typically a percentage of gross rent covering management, voids and bad debt, becomes a line an authority will test hard.

The London Plan has a dedicated build to rent policy with its own affordable housing route, so in London the tenure split interacts with the threshold approach rather than sitting alongside it. Outside London, plans vary from a full policy to silence.

Sensitivity testing that a reviewer accepts

Guidance expects sensitivity analysis, and a single-point appraisal reads as advocacy. The useful version tests four variables and shows the effect on the residual land value rather than only on the profit line:

1. Sales values or rents, at plus and minus 5 and 10 per cent
2. Build cost, at plus 5 and 10 per cent
3. The return itself, at the ends of the adopted range
4. Programme, with a six and twelve month delay to receipts

Present it as a table of residual land value outcomes with the benchmark land value drawn across it. That single layout answers the question the authority is actually asking, which is at what point the scheme can afford more affordable housing. Our note on viability appraisal outputs covers what else belongs in the submission pack.

Where an authority will push back

Five objections come up again and again, and four of them are avoidable.

Profit applied to the land cost, so the developer earns a return on the purchase price as well as on the development. Profit on affordable housing at the market rate. Risk double counted across contingency, finance and return. A blended figure with no tenure split. And the one that is not avoidable: a benchmark land value that reflects the price actually paid rather than existing use value plus a premium, which is a different argument from the return argument but gets bundled with it.

Deal with those four in the appraisal itself, in a short assumptions schedule that states each percentage, its basis, its source and the tenure it applies to. A reviewer who can tick that schedule off in ten minutes spends the remaining time on the land value, which is where the real negotiation lives. The treatment of meanwhile uses and benchmark land value is a related trap on sites with interim income.

Where the outcome is a reduced affordable offer, the Affordable Housing Statement has to carry the explanation in plain terms, because that is the document members read. The Viability Assessment carries the arithmetic.

Viability evidence submitted to an authority is generally published, so write it knowing that objectors and a reviewer will both read it line by line.

This is general guidance, not legal or valuation advice. Viability appraisals for planning should be prepared and reviewed by a suitably qualified valuer, and professional input is required for specialist technical reports. PlanScope provides AI-assisted draft reports for planning applications. Reports should be reviewed before submission. We do not guarantee planning approval.