Having completed Marble Arch Place, its landmark scheme overlooking Hyde Park, Almacantar is already working on plans for its next big project, this time in the City.
It will involve refurbishing and extending existing buildings, some new development, and key changes to the road layout to reinvent a hostile, dilapidated and decaying corner of the City. And it will be very green.
The transformation would be on a par with that of the Southbank Place estate, where Almacantar owns the fully let One and Two Southbank Place office blocks – the first to Shell and the second to WeWork.
But as the proposals navigate the City of London planning system, their journey illustrates the layers of risk developers must grapple with – from onerous planning conditions to timescale uncertainty. ESG requirements and the rising tide pushing against new development due to its carbon impact are simply extra pieces in the Jenga stack.
Almacantar chief executive Mike Hussey, who has developed more than 20m sq ft of space in the capital in the last 25 years, is well placed to talk about the challenges in today’s market.
“We are staring down the barrel of a gun,” he says. “It doesn’t look very good for development, but I’m hopeful circumstances will adjust.”
Planning problems
Adjust it might, but it’s unlikely to go back to the unwritten rule of thumb of ‘a third, a third, a third’ – by which developers could expect the cost of a site, the build cost, and the profit to be roughly equal.
“One of the things that enabled developers to feel more comfortable about taking the risk was that they were normally able to take an inefficient building, knock it down and build something that’s bigger. If you’ve got capital and debt in place and you know where your end market is going to be, 50% of your returns are going to be driven by the fact you can do something that’s bigger,” Hussey says.
But now that “planning authorities are much less keen on significant uplift in built area”, that equation no longer stacks up. Or when an increase in area is approved, it’s at a cost – affordable housing or some other form of development tax. Perhaps more impactful among the factors throwing viability into doubt is the length of time it takes to get a major planning consent through – and the lack of a predictable outcome.
Where the planning process used to take 12 months in the City and 18 months in Westminster, now two to three years is not unusual and bigger regeneration projects can take four to five.
This is too long for the investment periods demanded by private equity, a key funder, thus changing (and probably shrinking) available sources of funding.
The availability of debt is also more difficult because of the extended timeframes and lack of predictable outcomes. The sector has also been grappling with massive inflation in labour costs and build costs.
“If you combine all of that, ignoring the whole ESG debate, projects are taking longer to get on site, take longer on site, you can’t build as big and they’re costing 50% more than they used to cost – the vast majority of development projects are simply unviable,” Hussey says.
Hoping for pragmatism
This is one of the reasons Almacantar has not been able to buy in recent years: the margins just aren’t reflecting the risk.
The irony, of course, is that if developers sit on their hands, the lack of supply could lead to “massive inflation in the existing stock” with no new product to dampen down rents.
He hopes pragmatism will prevail because if planning authorities “get too dictatorial about it,” none of the urban regeneration projects will happen.
“The City Corporation may push some big developments through. But they’ll have to be very green, and we’ll have to give other benefits like infrastructure changes,” he says.
Meanwhile, developers like Almacantar are waiting for the secondary office market to correct to unlock further development opportunities.
Secondary office market
Take a hypothetical 1970s office building in a decent location. The owner paid £100m for it 10-15 years ago and they have collected income off it. But their occupier is moving out and they must decide what to do next. Hussey says: “Do you invest large sums in the existing building and call on your own capital to create an asset that isn’t worth any more than you paid for it? Or do you sell it? And if you sell it, who are you going to sell it to and for how much?”
A developer might offer £120m if they know they can redevelop; £50m if they cannot; perhaps £75m if they really like it and believe they will be able to create an attractive product with the “good bones” of the building.
“These owners may be forced to go back to the planning authorities and say, I need to build two more floors on top, or I need to knock it down. And the whole debate is going to go back into that risk question again,” Hussey says.
Planning policy is unlikely to shift in favour of redevelopment, he says, particularly given Labour’s dominance of central London boroughs (with the exception of the City) and going to appeal looks too expensive for small assets. Refinancing is also out of reach without a commitment to turn the asset into a green building.
“The thing that’s going to give has to be the land or the building asset value,” he says. “The bottom line is there has to be a correction in secondary assets.”
Where does all this leave the future of development?
“There has undoubtedly been too much redevelopment of buildings that could have been repositioned, but I also think there’s a little bit of overreach in the way that people are looking at this subject,” Hussey says.
Not least because many existing buildings cannot be retrofitted to suit today’s sought-after occupiers in sectors such as life sciences, medical and hi-tech.
“The central London boroughs are going to be very driven by sustainability and environmental considerations. And I think that they will be resisting redevelopment where they feel there is a viable alternative. But at the same time, they won’t want to lose occupiers or the ability to attract certain sectors,” he says. That means they will need to find a way to support demolition and rebuild in some form on some sites.
“I don’t think development is dead, but it’s going to be more difficult to do it and impossible without a shift in policy direction.”
To send feedback, e-mail julia.cahill@eg.co.uk or tweet @EGJuliaC or @EGPropertyNews
