The Environment for Property Development

Economic and Policy Forum of the Construction Industry Council

23 April 2012

Peter CosmetatosDirector of Policy (Finance)British Property Federation

The Environment for Property Development – CIC EPF, 23 April 2012 The voice of property

Session overview

> Introduction

> Context

> Specific issues, opportunities, challenges

> Conclusions

The Environment for Property Development – CIC EPF, 23 April 2012 The voice of property

Introduction

> The British Property Federation

> Lobbying to raise the profile of the commercial real estate industry and improve policymakers’ understanding of its role and importance

> So that the legislative, regulatory and tax environment within which our members operate allows them to flourish and contribute to a successful UK economy

> Working with other industry bodies in the UK and globally across the full range of relevant policy areas

> Your speaker – private sector legal/tax background focusing on property and finance

The Environment for Property Development – CIC EPF, 23 April 2012 The voice of property

Context – economic/industry

> Persistently weak and uncertain economic outlook

> Banks trying to reduce historic exposure to property

> Access to finance ever more difficult, and ever more expensive – so making new property investment and (particularly) development viable is not easy

> But huge variations in conditions around the UK

The Environment for Property Development – CIC EPF, 23 April 2012 The voice of property

Context – policy environment (1)

> Fiscal consolidation and public sector cuts

> Much reduced public sector investment pipeline

> Localism, decentralisation and the LGRR

> (Some) local rate retention from April 2013 – will LAs that are more ‘commercially’ interested in development be better alignment with business?

> Local Enterprise Partnerships (LEPs), Enterprise Zones (EZs), Tax Increment Finance (TIF) and City Deals

The Environment for Property Development – CIC EPF, 23 April 2012 The voice of property

Context – policy environment (2)

> Other (generally modest, targeted, limited) measures to support investment in infrastructure, housing, etc.

> Community Infrastructure Levy (CIL)

> Planning and the NPPF

> Neighbourhood planning

> Tax regime

The Environment for Property Development – CIC EPF, 23 April 2012 The voice of property

Specific issues – finance

> Development finance is limited and expensive

> Pre-lets and/or a strong sponsor usually a prerequisite

> October 2011 IPF/APB research spoke of falling loan-to-cost ratios, rising upfront fees, margins and exit fees, increasing use of recourse lending, and continuing regulatory uncertainty for banks

> Reliance on debt and access to and cost of capital generally differs enormously for different types of sponsor (REITs, private equity funds, etc.)

> Viability is a key challenge

The Environment for Property Development – CIC EPF, 23 April 2012 The voice of property

Specific issues – CIL

> CIL could be a major step forward, but serious problems could mean it stymies development:

> LA viability assessments often unrealistic

> Developers should be allowed to deliver infrastructure in lieu of payment of CIL

> Only net new floorspace giving rise to additional infrastructure needs should be charged

> Transition: pre-existing planning permissions shouldn’t be brought into charge by virtue of being amended

> Need for better and earlier consultation, provision for exceptions and charging schedule review procedures

The Environment for Property Development – CIC EPF, 23 April 2012 The voice of property

Specific issues – planning

> The National Planning Policy Framework (NPPF) and its presumption in favour of sustainable development (PFSD) is a big step forward

> Key question is how planning system will now work in practice

> PFSD, brownfield first and town centre first

> Five year land supply to meet housing needs

> Transition where no ~NPPF-compliant local plan

> Need for (consistent, manageable, authoritative) new guidance

The Environment for Property Development – CIC EPF, 23 April 2012 The voice of property

Specific issues – neighbourhoods

> Localism Act introduces provisions for a neighbourhood plan to be prepared by a neighbourhood forum authorised by a LA

> Effective lobbying won recognition that businesses as well as residents should have a role, and business neighbourhoods are now also contemplated

> Potential importance still uncertain, but neighbourhoods could be significant

The Environment for Property Development – CIC EPF, 23 April 2012 The voice of property

Specific issues – LGRR, etc.

> Local government finance reform – likely to result in a more complex and less different position than many had hoped

> EZs, TIF, city deals – a fairly limited and piecemeal approach to encouraging growth and investment (but good for areas that benefit)

> Effectiveness and impact of LEPs – jury still out

The Environment for Property Development – CIC EPF, 23 April 2012 The voice of property

Specific issues – tax

> Government focus on headline rates of corporation tax

> Long term assault on tax relief for capital expenditure continues

> Scope for the UK to develop its REIT (real estate investment trust) regime further to support particular areas of investment, e.g. social housing, debt finance or infrastructure

The Environment for Property Development – CIC EPF, 23 April 2012 The voice of property

Conclusions> A mixed bag in policy terms

> Lots of change, lots of new instruments and ideas

> Policy announcements sometimes seem more bling than substantive detail

> Important that government doesn’t introduce new barriers by mistake (CIL, financial sector regulation, etc.)

> Ultimately, the solution lies in the economy, confidence, occupier demand, access to finance