The Enabling Development Case at Craighouse: The story of the deficient deficit

We were sent the following article by Nick Honhold, who has been analysing the Craighouse Partnership’s enabling development case.

The developers have finally admitted, after years of stating otherwise, that the existing listed buildings on the site are indeed profitable without newbuild. Their argument now is that this profit is not enough and they should be allowed to puts lots of newbuild on Craighouse to make more profit.  They claim there is a conservation deficit on the site – i.e. that newbuild is required to bring the development to a level of profitability to make a financially viable percentage return on investment.

interior2

We are being asked to believe that this is the entrance hallway to a below-average value flat

Nick’s detailed analysis below shows that if you value the sales price of the conversions more realistically in line with similar properties, the Craighouse Partnership’s claimed “conservation deficit”  disappears. The developers can make the percentage return on investment they state is necessary by converting the listed buildings alone.

We would like to thank Nick Honhold for sending us this article.

The enabling development case at Craighouse: The story of the deficient deficit. Guest Article by Nick Honhold

The Craighouse site has many protections and it is explicitly against many of the council’s own and national policies to build on the land. The only way to get around this is to demonstrate that the preservation of the Category A listed buildings is not financially viable on its own and therefore requires the profit from a minimum amount of new build to make it worth the developer’s while to convert them. Now, there are all sorts of issues in those statements, but putting them to one side for the moment, we will focus on the financial argument, that there exists what is called a “conservation deficit” (meaning there isn’t enough profit to be made from the conversions alone to make it worth doing).

The Craighouse Partnership were very reluctant to provide detailed financial figures in Scheme 1 but were forced to do so for Scheme 2, partly through pressure from the community insisting they be made to do so. Their financial case is presented in a document that you can download from the Edinburgh planning portal (called 12_04007_FUL_ENABLING_DEVELOPMENT_NUMBERS_SUMMARY__SCHEME_2_-1722627 and best found by searching for the word “numbers” on the documents page).

The figures they published claim to show that if they only converted the existing buildings, they would only make in a profit of £1.2 million which they calculate to be 3.8% of Gross Development Value (GDV: basically the total income from sales). They use other precedents that developers should be allowed a profit of 20% of GDV (but see below). Bingo, a conservation deficit of 16% GDV; fire up the bulldozers.

Is this interior worth less than a new-build flat?

Is this interior worth less than a new-build flat?

But examination of the figures reveals that they have valued the sale price of all the converted flats at only £290 per square foot (”psf”). Elsewhere in the document they use a sale value of £350 psf for the proposed new build blocks of Burton and Napier, the two monoliths proposed for the bottom of the hill. Somehow, the Craighouse Partnership think the converted flats would sell for getting on for 20% less per square foot than these new build flats.

This looked very odd. So we phoned around local house selling agents. They gave us a range of valuations between £300 and £400 psf depending on the age and condition of a flatted property in Morningside. Higher values would be paid for new or recently refurbished properties with off street parking, lifts, new electrics etc. That would seem to describe both the conversions and the proposed new build at Craighouse. Never mind the stunning setting, views etc.

Part of the area that council planners have given consent to become a construction site

The Craighouse Partnership have valued properties in here 20% less than…

The next step was to look at the impact of the sale price on profit levels from the conversions alone i.e. without any new build. The table at the end of this article shows the calculations in detail for those who like those things.

napier obscuring Arthur's Seat

…properties in here. Really?

But the key points are these. If you put the same £350 psf sale value on the conversions as on the new build (And why wouldn’t you? The only thing that might detract from their sale value is the presence of large monoliths nearby damaging the setting of the buildings) the developers would reach a profit of almost £8 million on the conversions alone which is a profit margin of 20% of GDV and 25% of costs. Even using a more conservative sale price of £325, an easily achievable price in the area, they still make a profit of £5 million and a profit margin of 14% GDV and 16.5% of costs*.

So, there is no “conservation deficit” even using the developers own costs and own way of calculating it.

interior craighouse

Interior at Craighouse

It is important to make clear that for all of these calculations, we have used the costs exactly as stated by the Craighouse Partnership and included them all. Several of those costs are questionable such as an across the board 12% of costs as consultants fees and a substantially increased cost of converting New Craig in Scheme 2 compared to Scheme 1 (by over £3 million). When we do get into the costs, the argument falls apart even further. But even without questioning the costs, there is no conservation deficit.

We’ve used the £350 sale value because it is the sale price for the cheapest of the new build flats. If we use the higher sale value of £390 that the Craighouse Partnership put on the new build flats in Clouston Villa (which would be built next to and over shadow South Craig) the overall profit on the conversions alone would climb to £12 million, a margin on GDV of 28% and on costs of 40%.

20% less than the newbuild? Less than average for the local area?

Nor is the developer’s case helped at all by Retties (apparently the source of their £290 psf value), leafleting the area recently about an expected 20% increase in property value in the area over the next year or two. Just that would increase the sale price from £290 to £348 psf and £350 to £420. But even without this hoped for rise in property prices, there is no conservation deficit.

There is no way in which the council should accept the developer’s published figures as showing a conservation deficit. And if the Craighouse Partnership manages to come up with another set of figures for Scheme 3, then that will just demonstrate that we cannot trust a word they say. Indeed, we expect they will suddenly manage to find that the conversion costs will be higher than the previous studies had found, just as they did between Schemes 1 and 2.

The developers have their eyes on the bottom line, not on the skyline of this site and this city. Our simple and well supported analysis shows that the buildings can be preserved and the site saved without any new build.

turmeau hall

Most of the listed conversions will be high-end newly finished conversions, have stunning views – either across the city or of the beautiful grounds – and also have access to  communal areas like this. Are we really to believe these properties are 20% less psft than the newbuild and less than the average price psft for the immediate area?

There are many other arguments around the enabling development which will be addressed elsewhere. But on the simple, first and essential step of showing that new build can be justified, the developers have failed. There is no conservation deficit.

The table is here to let anyone check the maths that has gone into this analysis of how the deficient deficit was created. Note that as well as %GDV the table shows profit as a percentage of costs, which is actually what the guidance says should be used and note that the same guidance recommends a profit level of 15-20%.

*The line highlighted in red is their claimed sales values – the line in green is a more realistic sales values, based on prices for similar properties in the area and price ranges by sales’ agents.

Sale price per square foot (psf) Total sales Total costs** Profit Profit as % of income (GDV) Profit as % of costs
£290 £31,959,450 £30,747,182 £1,212,268 3.79% 3.94%
£300 £33,061,500 £2,314,318 7.00% 7.53%
£310 £34,163,550 £3,416,368 10.00% 11.11%
£320 £35,265,600 £4,518,418 12.81% 14.70%
£325 £35,816,625 £5,069,443 14.15% 16.49%
£330 £36,367,650 £5,620,468 15.45% 18.28%
£340 £37,469,700 £6,722,518 17.94% 21.86%
£350 £38,571,750 £7,824,568 20.29% 25.45%
£360 £39,673,800 £8,926,618 22.50% 29.03%
£370 £40,775,850 £10,028,668 24.59% 32.62%
£380 £41,877,900 £11,130,718 26.58% 36.20%
£390 £42,979,950 £12,232,768 28.46% 39.79%
£400 £44,082,000 £13,334,818 30.25% 43.37%

** Costs are as given by the Craighouse Partnership including financing costs

* Note from Friends of Craighosue: comparing profits is complicated. Not all profit calculations are the same. In fact they can vary massively depending on what is called the “business model”, which is why the same profit can be shown is different percentages according to the way you calculate it.

 

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8 Responses to The Enabling Development Case at Craighouse: The story of the deficient deficit

  1. Colin says:

    Great work, very interesting. I believe the conversions would sell for more psf than any (hopefully none) new build. This seems to be the case comparing like for like nearby flats.

  2. Pingback: Scheme 3: The latest proposals | Friends of Craighouse Grounds and Wood

  3. Pingback: Enabling Development #fail: Undervalued sales prices – even larger profit for Craighouse Partnership | Friends of Craighouse Grounds and Wood

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