Commercially Feasible Development Capacity - What Is It?

In this blog I want to look more closely at the modelling of residential development feasibility carried out for the Proposed Auckland Unitary Plan (PAUP). The concept of development feasibility has been central to the consideration of the PAUP. As I set out in my blog of 5 August 2016, while the plan recommended to Auckland Council by the Independent Hearings Panel provides the physical space for up to 1.5 million dwellings, feasible capacity is assessed by the panel to be 420,000 dwellings. The 1.5m number was driven by the need to get to 420,000, not the other way around.

The need to provide capacity for future residential growth is an important aspect of any plan, and the AUP has taken considerable strides to open up capacity in the existing urban area. This is a good thing. What I want to look at is how the plan has estimated capacity and what the implications are for planning practice.

First up, the difference between what can be termed a theoretical  measure of capacity enabled by a plan (in the case of the PAUP, the 1.5m dwellings) and what may be realistic or feasible has been an issue know to planners for a long time.  What is different about the AUP  process is the extent to which determination of what is feasible has been driven by commercial considerations, and the extent to which the feasible capacity (rather than theoretical capacity) has dominated the deliberations of the Panel.

To date, planners have tended to focus on the theoretical figure and used a number of proxies to work out what may be feasible within that number. That feasible number is then considered in terms of whether there is enough capacity to meet short to medium terms needs, knowing that what is feasible will change over time and that plans get modified and updated. Taking a different approach to both issues is not necessarily wrong, but there are policy implications to consider.

First up is the question of which to look at first: theoretical or feasible capacity?  As I said, planners have always been taking stabs at what is feasible, rather than just theoretical, but in doing so they have always had an eye on the theoretical number as the starting point. Why is that? Well the Council's 2013 Capacity For Growth Study makes the following point[1]:

"It is critical that we understand the maximum number of dwellings that the plan has enabled in various areas, because although it is highly unlikely that all of these opportunities will be taken up, it is probable that at least some could be. It is important to be able to accurately capture the degree of maximum theoretical change the plan enables as a best (or worst) case scenario to determine what the maximum level of change that the plan allows is, based on the existing level of development, current cadastre and generally compliant future development".

What are the risks of not estimating theoretical capacity?  The Council report doesn't say exactly, but I guess they could be infrastructure-related or possibly in terms of potential cumulative changes to the amenity and character of an area.  If you are an infrastructure provider - like the Ministry of Education thinking about future schools - which number do you plan for in a specific area: the much bigger theoretical number or the smaller 'feasible' number? If you are trying to communicate to a community what is likely to happen to their area in the future, which picture do you paint: the theoretical or the feasible? The community will probably go straight to the theoretical maximum figure and say that is what should be planned for in terms of transport, open space and the like.

Are these big risks? If there is a big difference between the plan enabled number and the feasible number, perhaps. If the numbers are not too dissimilar then it is not such a worry. Equally, if growth is lumpy and concentrated in some areas more so than others, then yes, there may be issues focusing on one set of numbers and not the other.

The counter point is that too much of a focus on the theoretical situation means that actual feasible capacity may be insufficient to meet housing demands and as a result ramp up land and house prices. As we are constantly being told these days, there needs to be lots of feasible capacity for the housing market to operate efficiently. So don't focus on the theoretical figure. 

In the past, planners ran off some rules of thumb as to the difference between theoretical and feasible capacity. I can remember in the early 1990s estimating for the former North Shore City Council area that about a third of the plan enabled capacity figure was realistic and likely, while another third may be feasible in the longer term, but the final third was never likely to happen. This was based on a survey of people's intentions to redevelop their sites. In coming to a picture of the theoretical capacity, we had already discounted (based on a sample survey) residential properties where we considered physical constraints precluded redevelopment. So the estimate at that time of feasible capacity was based on people's intentions and a stab at immovable constraints.  I judged that so long as there was 5 to 7 years supply of feasible capacity relative to demand, then there was sufficient buffer in the system, and there was time to do the forward planning needed to identify and rezone more land over that time to provide for growth 7 to 15 years out. The 2006 Auckland Regional Council Capacity for Growth Study did something much the same. Plan enabled residential capacity was estimated to be around 216,000 dwellings. A modified assessment to take into account feasibility issues reduced that number by 30%. That adjusted number was judged sufficient to cater for about 15 to 20 years growth.

Up to the mid 2000s, this approach to estimating capacity seemed to work Ok. Since the late-2000s, house prices have accelerated and the question of whether there is sufficient feasible supply has become a core issue.  Whether house price rises have been driven by a shortage of capacity (rather than a shortage of housing) is something to come back to.

The focus on house prices and the need for 'buildable'  development capacity has brought forward the idea of commercial (or financial) feasibility of development as the way to determine what may be realistically built, rather than some form of consideration of  physical constraints or people's intentions.

The approach to feasible capacity based on a 'commercial' model of development is a relatively new approach in NZ. It is a principle set out in the draft National Policy Statement on Urban Development Capacity recently put out by the Minister for the Environment. It is a strong feature of the UK planning system post changes to their National Policy Framework.

What is it? The Panel's Overview report[2] says that "feasible enabled residential capacity means the total quantum of development that appears commercially feasible to supply, given the opportunities enabled by the recommended Unitary Plan, current costs to undertake development, and current prices for dwellings. The modelling of this capacity at this stage is not capable of identifying the likely timing of supply".

The report to the Panel from the relevant expert group does note that all versions of the model used to estimate feasible development capacity (the ACDC Model) "are not a forecast of development – they are a measurement, based on a snapshot in time of the opportunities for commercially feasible development given ‘today's’ costs, prices and planning frameworks".

Is it a realistic means of estimating the capacity needed? Here you have got to say that the IHP and associated experts have taken the concept much further than others are prepared to go. As I mentioned, the concept of development feasibility is part of the UK planning system and so a range of reports and guidelines have been developed in the UK as to how to assess feasibility on a site-by-site basis. They all basically follow the same methodology.  Sale prices for new dwellings to be constructed are estimated, costs of building them are then deducted along with fees and charges, allowance for financing costs and profit for developer; and in the UK at least, the costs of any planning obligations. The residual (expected return less costs) is what can be spent buying the development site. If sales less costs means a residual greater than current value of the development site, then the development is feasible. But if sales less costs result in a residual less than current site values, then the development is infeasible.

But can you apply this methodology across space and time?  The Royal Institute of Chartered Surveyors (RICs) state that area-wide feasibility testing over a medium to long term time frame is not reliable or possible at present (see for example: RICS April 2015, Financial Viability Appraisal in Planning Decisions: Theory and Practice).  

The Auckland capacity model (ACDC) uses site level rating valuation data in relation to costs of purchase of development sites, but as we know mass appraisal data is not market value (but where else do you start?). And what about costs over time? Has the ACDC model been calibrated? Has it been applied to two known points in time, such as rating data from 2011 and the results compared to what actually got built up to 2015?  

RICs go on to note a number of issues with standard development feasibility testing at a site-by-site level, not the least of which is how you address land values. Land values should always be hovering around the point of development in-feasibility. Under the ACDC model used by the IHP (as far as I can tell), land values are static. But wont land values rise once the new zonings are in place?  It is easy to estimate the increase in the number of units that may be built on a site and say that sale values will be x rather than y, and as the result the residual increases. Landowners are not dumb and over time land values will adjust to the new normal.

In short I'm pretty suspicious of the feasible development model because of these issues. My prediction is that in 5 years time, a re-run of the ACDC model will show that feasible development capacity with the zonings and development envelopes of the AUP in place is much less than that estimated by the current modelling round. This is because of land values adjusting (let alone cost information changing). There will be renewed calls to expand capacity and that house prices are rising due to constricted supply. 

However I accept the point that some form of estimate of feasible capacity is needed. I'm just not convinced that the ACDC model is the right way to go. At the end of the day what seems to be needed is a competitive land and development market, with more willing sellers of land ready for redevelopment than buyers. Isn't that what we need to aim for? Using the commercial feasibility approach to increase the pool of available development sites is one way to go about it, but it is a complex way.  The other way is to develop some form of heuristic that gets close enough. For example, the various runs of the ACDC model seem to be consistent at around 15 to 20% of theoretical development being feasible.  So in other words, if needed feasible capacity is 100 dwellings, then theoretical capacity needs to be 500. The other way to crack it might be to say that to enable a competitive market, for every development needed, there needs to 3 to 5 sites to choose from, or something similar.

Does it matter at the end of the day? Well the question I posed in my 11 August 2016 blog was whether in getting to the 420,000 figure, the AUP panel has overlooked some more practical issues of where the feasible capacity is located. Added to that is the price of the dwellings needed to justify the redevelopment anticipated. Here the ACDC model and consideration of commercial feasibility is a bit more useful. As an example, below is a table and graph which compares feasible development capacity, as estimated by the ACDC model for the Council planner's evidence to the Panel and what the Panel has recommended. This is for business and residential zones. I have grouped the data into the four sub regions I used in 11 August blog.

Table 1: Feasible development capacity estimate (dwellings)

Urban Sector	Council's plan	IHP's plan	Difference
North	36,800	71,878	35,078
West	36,200	24,109	-12,091
Central	41,800	81,636	39,836
South	60,400	52,710	-7690
Total	175,200	230,333	55,133

Figure 1: Feasible development capacity

So feasible capacity, while growing overall between the two versions of the plans, increased in some areas but reduced in others. The reduction in feasible capacity between the two plans in the west and south seem odd. You would think it would be helpful to increase capacity in the west and south, given the affordability profile of these areas. Of course the results may be a contrivance of the ACDC model assuming that the capacity in the west or south requires more expensive forms of housing (e.g. apartments) which are less likely to sell, when in fact the capacity available will be taken up by less intensive (and cheaper) forms of housing like town houses, terraces and infill units. Is the increase in capacity in the north sensible, given transport constraints and limited employment opportunities?

In terms of the sales values of the resulting houses needed to make the redevelopment feasible, Figure 2 below is from the data in the Panel's report and similar data in Council's evidence.

Figure 2: Estimated sale price of feasible dwellings ($1,000s)

While probably needing to be taken with a grain of salt  given the above reservations, the data suggests that the feasible capacity is heavily dependent upon higher priced dwellings being built and sold. A number of folk have pointed out the miss-match with household income profiles for the region. One response is that the houses actually built will be smaller than that estimated, or alternatively, there will be fewer houses. A steep drop in house prices and land values would alter the calculations.  But is that likely to happen? 

So after all that, is the feasible development capacity enabled by the plan really 'feasible'? 

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[1] Capacity for Growth Study 2013: Methodology and Assumptions, page 50. Auckland Council. Retrieved from: http://www.aucklandcouncil.govt.nz/EN/planspoliciesprojects/reports/technicalpublications/Documents/tr2014009capacityforgrowthstudy2013paupmethodolgyandassumptionspart1.pdf

[2] Page 49.

http://www.aucklandcouncil.govt.nz/EN/planspoliciesprojects/plansstrategies/unitaryplan/Documents/ihprecommendations/ihpoverviewofrecommendations.pdf

Auckland Unitary Plan: What are the implications 2?

In the last blog I set out some of the bigger planning issues implicit in the recommended Auckland Unitary Plan providing the physical capacity for 1.5 m dwellings, with 'feasible' capacity within that number for up to 420,000 dwellings, over a 30 year time frame.

In this blog I want to look at the spatial allocation of the 'infill' capacity provided across the region (the 60% of future growth). Why is that important? Surely it is the top line number that is important - the 420,000 figure? At the level of broad demand and supply, yes the top line is important, but Auckland is complex. Its geography of harbours and hills tends to create natural sub regions which reinforce different communities ("I live on the Shore", or "I live out West", for example).

People tend to develop social and community networks within these broad areas and tend to want to stay within their sub region. The region's geography also tends to constrict travel between these sub regions, which further reinforces the sense of a four different urban sectors.  Planning theory would say that these sub regional sectors are important to the social and economic well being of the region. So while the top line is important, in getting to that top line figure it is important not to ignore its composition across the sub regions.

So some useful questions to ask is if the feasible capacity provided in the recommended plan matches past growth patterns and future housing demands in these sub regions; and what about jobs/housing balance at the sub regional level? If the capacity is not in areas of demand, then that implies a question of whether the plan is meeting needs. If housing and jobs are not related, then there will be extra transport issues to address.

The Panel's report does not set out in detail where the 1.5m 'plan enabled' dwelling capacity is provided. The Panel's report only provides details on  'feasible capacity' in residential and business zones, by Local Board area[1]. So the following picture is not a complete picture of where growth may go, given that enabled capacity in the existing urban area is about five times bigger than the estimation of what is feasible. Moreover, there is no certainty that the feasible development will occur where the model says it will occur.

Setting aside those limitations, we can still get a feel for the issues.

Keeping to the bigger picture level, the table below groups the Local Boards into four large sub regional areas. I have dropped out the more rural/greenfields orientated Rodney and Franklin Local Boards from the analysis as the data on feasible capacity is for existing residential and business zones (not future urban or rural land). Table 1 sets out the share of dwellings consented between 2001 and 2016 and the feasible capacity provided by the recommended Auckland Unitary Plan in residential and business zones, across the four urban sub regions. I have used the share of growth and share of capacity to compare the two different data sets.

 Table 1: Dwelling growth versus feasible dwelling capacity

	Share of growth in dwellings 2001-16	Share of feasible dwelling capacity 2015-2040
North	32%	31%
Central	29%	35%
West	10%	11%
South	29%	23%

Figure 1 is the associated bar graph.

Figure 1: Dwelling growth versus feasible dwelling capacity

Note: while the percentage differences may look small, they are of a large number. 

What is interesting is the lesser capacity provided in the south, relative to previous growth patterns. The central area takes a big step up in terms of growth capacity. So is this a move towards greater centralisation of growth, consistent with the quality, compact growth strategy?

The miss match between past and future growth in the south is concerning. 

If we take a closer look at the figures of recent growth and future capacity at the urban Ward level, then we get the following picture of capacity versus recent growth.

Figure 2: Dwelling growth versus feasible capacity by Ward

From this it is apparent that a lot of the extra capacity in the central area is provided in the eastern outer Isthmus - the area in the Maungakiekie-Tamaki Ward. Somewhat conversely, the more western Albert Eden Roskill Ward has much less capacity relative to past growth.  So while it's a shift in emphasis towards the outer Isthmus, it's a swing east. Is that reasonable? Perhaps it is a reflection of the fact that much of the eastern outer Isthmus has a large proportion of Housing NZ stock. Has its time come to be the main focus of redevelopment (and gentrification?)

When the feasible capacity provided by the Plan is compared to possible demand, as estimated by Statistics NZ[2] (high growth scenario household projections 2013-2038), then at a sub regional level, we get the following picture in Figure 3.

The north has lots of capacity relative to demand, but interestingly the central Isthmus area has relatively less capacity than demand might suggest, even with the lift in capacity set out above. Some of the demand to the west and south will be meet by greenfields growth and so is not covered in the feasible capacity figures set out. 

Figure 3: Dwelling demand versus feasible capacity

Now I would be the first to say that the above analysis is not fool proof. The estimate of future demand takes into account past growth patterns, plus future potential as indicated by current (not proposed) zonings. So there is a degree of circularity to the projections and the capacity figures. Nevertheless, the picture does seem to be that there are some imbalances at the sub regional level.

For the west, the Stats NZ projections suggest growth of 40,000 households, but feasible capacity under the AUP for something like 26,000 dwellings. This is odd as the west seems to have had a substantial upzone when the notified plan is compared to the IHP's recommended plan.  This is where things get a bit odd as the previous modelling of capacity under the Unitary Plan zones as proposed by council through evidence showed that the west had a feasible capacity of 40,000 dwellings[3]. So an upzoning has seen capacity go backwards? This is an issue that I want to come back to. The same situation looks like it has occurred down south. 

When the feasible dwelling capacity is compared to employment growth between 2006 and 2015, then other miss-matches start to arise. Table 3 uses data from Stats NZ business demography data set.

Table 3: Share of employment growth versus share of  feasible dwelling capacity

	Feasible capacity 2016-2040	Employment growth 2006 to 2015
North	30%	22%
Central	33%	38%
West	11%	8%
South	26%	32%

Greater dwelling capacity in the central area is beneficial, as the central area accounts for a large share of employment growth. Less housing capacity out west and up north may be sensible in terms of employment access. The west has never had a strong employment base. The big lost opportunity seems to be the south where employment growth has been strong, along with dwelling growth, but the feasible dwelling capacity provided is lower than is needed.

So my suspicion is that in its haste to get to a big number - 400,000 feasible dwellings - the recommended Plan has not really looked at the implications at the next layer down. I have also seen a possible issue with more physical capacity not really leading to more feasible capacity in two areas where you would think more capacity is important for low to moderate income households - out west and down south. Another thing to look at.

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[1] See page 60

http://www.aucklandcity.govt.nz/council/documents/unitaryplan/ihpoverviewofrecommendationsann1.pdf

[2] Sourced from: http://www.stats.govt.nz/browse_for_stats/people_and_communities/Families/SubnationalFamilyandHouseholdProjections_HOTP13-38.aspx

 I have used household projections rather than population projections to avoid having to convert population into dwellings.  One household does not exactly equal one dwelling, but it is close.

[3] See:  file://081a%20Ak%20Cncl%20-%20General%20-%20(JD%20Faigray)%20-%20Economics%20(1).pdf

Auckland Unitary Plan: What Are the Implications?

Auckland Unitary Plan: What are the Implications?

In this post and ones to follow, I want to look at the Auckland Unitary Plan: Its implications for Auckland and the planning issues that it raises.

First up a declaration of interest. I'm not a disinterested observer. I helped prepare parts of the Plan and presented evidence to the Independent Hearings Panel that considered submissions on the proposed Unitary Plan.  No doubt I will be involved in applying the plan in the future. I'm also an Auckland resident.

To start with, lets look at the big picture.  The Plan provides the space needed for 400,000 dwellings. This is apparently enough for the next 30 years. What is not totally clear is that as far as I can tell, the Plan actually provides capacity for up to 1.5 million dwellings.

The difference is between what is called plan enabled capacity (an estimate of the physical capacity enabled the various zonings), and feasible capacity which is based on modelling of what may be feasible for a developer to build. Based on the reports provided by the Panel, I have found the following figures:

Area	Plan enabled	Feasible
Residential zones	970,554	185,339
Business zones	347,147	84,732
Greenfield areas	181,770	138,117
Rural areas	;       14,220	14,220
Total	1,513,691	422,408

Having lots of capacity is not a bad thing. What the numbers do raise is a number of planning issues that I want to look at:

The feasible development potential of the residential zones is estimated to be about 20% of the physical capacity.  This is obviously a big assumption. To get one house built, do we always need space for five?

Is a 30 year time frame too long? Can we really predict growth demands that far ahead? In the past plans looked out 20 years - the first 10 years covered the legal life of the plan, while the next 10 years provided a buffer. The shift to a 30 year time frame is a new move.Is it appropriate given the difficulties of predicting future conditions?

The Plan says that there should always been at least 7 years supply of development opportunities 'ready to go'. The Plan has provided 30 years supply, so do we not need to do any more planning for the next 23 years?  

If the actual objective is enabling more competitive land and development markets so as to moderate house price increases, then is it more a matter of keeping a large pool of possible development opportunities on the go so that there are many more choices for developers, rather than just capacity?  

The estimate of feasible capacity is based on a model using current data about property prices and costs of development. Is it reasonable to use that model to identify feasible capacity 30 years ahead?

Is the model used robust enough to justify so much weight on needing to find sufficient feasible capacity? Has the model been validated by applying to previous growth patterns? How does the model address changes in land values that inevitably follow changes in zoning?


So lots to think about. In the next post I want to look at the geographic spread of the plan enabled and feasible development capacity proposed by the Plan.