Community Land Trust Fund

Delivering Affordable Sustainable Housing
Context setting:

Viability assessments

To be viable, the value of any completed development must exceed the nett cost of its development.  This applies whether the developer is selling the completed home, or is providing it for rent long term.  It also applies whether the development is for a profit making organisation or not:  the only difference there is whether or not a profit margin is included in the appraisal.

The value is a function of the selling price or the rental stream.  The nett cost of provision can be reduced by grant or the provision of land on beneficial terms.

The costs of a development need to be looked at both in terms of capital and revenue.  Capital costs are those costs incurred in developing the home.  Revenue costs are those associated with managing and maintaining a rented property.

Capital costs are built up from:

  • Land purchase price
  • Build costs, including general contractor’s overhead and profit, cost of defects warranty, etc.
  • On-costs, which comprise:
    • Professional fees:  architect, surveyor, engineer, site investigation, CDM assessor, etc.
    • Statutory fees and costs:  planning permission fee, Building Regulations fee, highways bond, services connections and bonds, etc.
    • Finance charges through the development period
    • For housing for sale, sales costs, e.g. agent’s fees.

Revenue costs of homes for rent comprise:

  • The costs of letting, managing and maintaining the property, including provisions for long term renewal of components.
  • Finance charges.

The value of homes for sale is the sales prices that can be achieved in local housing market conditions less costs of marketing and sales.

Calculating the value of a rented home is more difficult. Traditionally organisations have calculated the value of these homes by projected forward the income and expenditure of the homes over time and then discounting these cash flows back to today’s value. The cash flows are discounted to recognise that the same money in 30 years time is worth less than it would be today. This is known as a Discounted Cash Flow (DCF).  The result of this DCF is known as the Nett Present Value (NPV).

It is usual for this cash flow to be projected forward for at least 30 years to recognise that homes, if properly maintained will last a lifetime.   This is the basis of the Appraisal Tool.

Inherent in the NPV calculation is the Discount Rate.  That is the rate that is used to bring the future cash flows back to today’s value. This is always expressed as a fraction. This should reflect the risk and return that an organisation is expecting from a particular project. Many organisations will use the cost of funding as the discount rate.

Even if the NPV of the rental stream exceeds the nett cost of provision, it does not necessarily mean that nett rental income will exceed costs from day one.  At typical HCA grant rates, social rented properties generate revenue deficits for the first few years, only moving into surplus in the latter years of the appraisal term.  This is not a problem for a well established housing association with significant reserves, where development activity represents a relatively small percentage growth in stock numbers per annum.  However, it can be an insuperable problem for a new organisation.

We hope that this hasn’t put you off.  All housing development is difficult and messy, and full of unforeseen and unforeseeable events. Even experienced developers find it hard, so don’t think that CLT housing development is uniquely hard, lengthy or risky.  It is inevitable.