Articles

Developing your returns

Release Date:	29 August 2007
Original Publication:	Property Matters - Summer 2007

Lower returns from conventional property investment in the UK real estate market are obliging investors to look increasingly to development – whether new build, redevelopment, conversion or refurbishment – as a means of providing better yields. Here, some of our real estate partners discuss how this trend has led to changes in their practices and the expertise they have developed as a result.

Ian Paul: “I think it’s interesting how the line between investment and development clients is becoming more and more blurred.We are seeing a definite trend in the current market for investment clients to become quasi developers as they find it difficult to see value in traditional investment deals. Many of our investment clients are aware that we have huge experience of acting for the pure developers across the whole range of commercial, residential and mixed use development work. I think that they can see that we understand what the key issues are for them and add value by making a point of understanding what they are seeking to achieve. Many of the deals we have been involved in are complex in terms of structuring but we know that clients want us to make life as easy as possible for them so that they do not have to get involved with the minutiae.That’s why we make sure that these deals are dealt with at a senior level so as to control and project manage the transaction.”

Jim Garton: “I believe that market forces are playing a key role. I’ve been involved in the hotel development sector over the last few years.This has seen a significant expansion and the big brand hotel chains, in particular, have been especially acquisitive during this time. Competition between hoteliers for new sites is immense and a number of operators have geared up significantly to meet the challenge of increasing their market share in this rapidly expanding market. I have acted on a number of redevelopment and refurbishment schemes for landowners who will redevelop sites and grant leases or operating/management agreements to the hotel operators.The schemes often contain a mixed use element in order to ensure planning consent, which brings with it other complexities that I have become accustomed to dealing with.”

Mark Baker: “I would certainly agree that there has been a significant increase in development activity if the funding levels are anything to go by.As a core part of our real estate development finance practice we act for banks, institutional funders, mezzanine funders, equity funders, housing associations, investors and the public sector. Over the years I have been involved in large-scale multi-million pound development finance projects and smaller scale schemes, but what has been interesting to see is the noticeable increase in the volume of development finance transactions lately.As a result of this increased activity I have been able to gain an in-depth knowledge of the specific and distinct requirements of both lending and borrowing clients in relation to development finance.”

Ronnie Hooberman: “I agree that the market and current trends are leading us to develop even greater expertise in certain areas. For many years I have been advising housebuilders, notably Fairview, on affordable housing transactions which are now an essential element of all but the smallest residential schemes. Earlier this year I devised a low cost market housing model that they are now implementing as part of a Section 106 package. I am also currently on the other side of the fence, advising one of the largest Housing Associations, A2 Housing Group.This is a field that requires specialist expertise and will become increasingly important as the Government seeks ways of meeting the housing shortage and ploughs more funds into that sector.”

Alan Spiers: “There is no doubt that development requires specialist expertise, much of which comes from experience. I have developed particular expertise in dealing with mixed use urban regeneration schemes, many of which have involved public/private partnerships. In these situations, the developer has to show a return and the local authority can't feel that it’s being fleeced. It has to be a win: win situation for both parties.This can be achieved by offering both parties an element of the upside through overage arrangements.This mechanism takes the edge off the negotiations and allows the parties to achieve agreement on the commercial issues since they are both in the same boat. It makes it easier for them to work together because their interests are more closely aligned. I have found that arriving at this settlement involves a degree of negotiation and trade off at the outset.This is something at which we have become very adept. We know that it is important to listen and understand the other party’s viewpoint rather than trying to score points. Also it’s very important for us to be involved in the early stage negotiation of the heads of terms so that we can add value by assisting with the structuring of the transaction as part of the client team.”

Daniel Levy: “It’s not just changes in the market that are affecting our development practice.There have also been changes in the law.Take rights of light for example.As a result of recent case law, it was thought that the beneficiary of rights of light affected by development proposals would get damages rather than an injunction against the developer.That has all changed and my advice to developers is firstly, after you get your rights of light survey, be careful about riding roughshod over the rights of adjoining owners.The courts are now willing to use their powers to stop development where the rights of others are infringed. Secondly, there has been a flurry of cases which indicate that there is a greater risk if the development affects residential owners. It is early days so far as impact on commercial premises is concerned but the key message is to tread very carefully.”

Oliver Goodwin: “The one constant in planning now is that the rules are constantly changing; the Government is still preoccupied with the impossible task of trying to square the circle of making the system faster and simpler, whilst at the same time being more accountable to local communities.The larger schemes today typically involve some element of partnership between the public and private sectors, and often need to factor in the potential for compulsory purchase powers for site assembly. My experience of working on the application for the London Olympics was that massive and complex schemes can secure consent rapidly if the right level of resources from all sectors are applied to it and if all parties are committed to the delivery programme. Major infrastructure projects are another matter.The story of Crossrail and my current experience in the Crossrail Bill lends support for the Government’s determination to find a better and quicker way to determine these issues – through an independent commission – as outlined in the Planning White Paper that was published at the end of May.