The New Appraisal Guide: What Does It All Mean?
The Department for Communities and Local Government (DCLG) has recently published a new Appraisal Guide for assessing the impact of public sector investment in housing, development and regeneration.
The guide has implications for LEPs and other public sector investment agencies who may soon be looking to change how they appraise project proposals, particularly if their programmes are funded by DCLG. Project sponsors will also need to rethink how they can demonstrate the impact of their schemes in the new framework.
A Move towards Land Value Uplift
The new guide departs from the traditional approach to estimating economic impact. Traditionally applicants needed to demonstrate how their scheme would contribute to an area’s economic output, measured as Gross Value Added (GVA). This would typically involve thinking about the number of new jobs that could be accommodated on site, estimating their economic output and measuring this impact over a five-year period. The new approach focuses instead on land values to capture economic impact.
What Does this Mean?
The two approaches estimate the economic impact of a public investment in very different ways.
Under the traditional approach, it has been difficult to estimate the economic impact of housing schemes as residential developments do not generate much employment. The new approach makes it easier as the land value of a housing site is much easier to define. Conversely, employment-led developments may perform less well under the new approach. Previously, employment impacts could be valued over a five-year period. Now the impact is restricted to a one-off increase in land value. In parts of the country where the demand for employment land is limited this is likely to result in a lower Benefit Cost Ratio (BCR).
Projects that lead to a change of land use, such as a flood prevention scheme that unlocks agricultural land for a housing development, are likely to deliver the greatest economic impact using the new approach. The difference in land values between agricultural and residential uses is significant and will almost always overshadow any uplift associated with schemes that simply secure more intensive or higher productivity employment.
As the figure below highlights, residential and commercial land values vary significantly across England and schemes in high demand areas i.e. major cities and the South East are likely to be more favourably assessed.
The Implications for Funders and Applicants
The new guidance will affect DCLG funded projects immediately. For other projects and programmes, the new approach may be adopted more widely once it has become more established. For now it is important that investors, such as LEPs, understand the consequences of the new guidance and begin to consider how it can be reflected in project appraisal frameworks. More than ever, it is essential that funders take a rounded approach to assessing value for money and prioritising investment.
Where projects generate a significant land value uplift, LEPs should begin to expect applicants to demonstrate the scale of expected uplift and use the evidence when appraising the project. LEPs should however:
• maintain the traditional (jobs to GVA based) approach in tandem to demonstrate the economic contribution of the investment to their region
• continue to consider additional impacts such as environmental benefits and the social values, especially for affordable housing schemes
• and still consider non-quantified wider economic impacts.
Priority should continue to be given to projects that contribute to the wider economic objectives of an area and build on existing local investment.
Applicants and scheme sponsors, should be aware of the change and in the short term, expect different funders to have different requirements. The guidance is still being tested and until it becomes more established it will be important to stay abreast of developments and be ready to undertake a land value uplift assessment.
Regeneris advises LEPs on their assurance frameworks and has a good understanding of the GVA and land value approaches to appraisal. Our team can advise applicants on the most appropriate approach for demonstrating value for money and can develop appraisal frameworks that LEPs and others can use to prioritise investment locally. For any questions about the new appraisal guide or LEPs please contact Associate Director Daniel Lindsay.