The C-word simply is not uttered in certain circles of the Yorkshire property industry. Contamination draws extreme reactions from little significance to ignore at your peril.
Recent research found that one in four commercial properties in the UK’s largest cities are at risk from contamination and environmental risks. And Yorkshire towns top that league table, says the Enviroscreen report by Landmark Information Group.
The city most affected in the county Sheffield is among the top three cities in all six categories covered by the report (see opposite). Bradford and Leeds fare little better, appearing in the top half of five categories.
On initial examination, the findings are not surprising. Yorkshire’s industrial history and the contamination it left behind are well known. Many property professionals will shrug their shoulders at the findings.
But the red-hot investment market is causing anxiety. In the rush to do deals, some buyers are taking short cuts with due diligence. A recent High Court ruling involving a site in Bawtry highlighted the dangers to landowners (see box, p180). And, with sources of public funding drying up, that other C-word which causes developers even more offence costs is beginning to appear.
So just how much risk does contamination pose for developers and investors?
Richard Pawlyn, managing director of property and environment at Landmark, himself a surveyor, says that, at worst, contaminated land could be become unusable, causing property values to plummet.
Pawlyn’s warning is stark: “If you are going to develop in Bradford, Sheffield, Leeds or York, you’re really going to be a bit of mug not to spend money finding out about sites. The differences in construction costs are huge, and it is calamitous if you find it out half way through.” He adds: “We know a lot of people are ignoring the problem.”
Yorkshire has one of the highest concentrations of previously developed land in the country. According to the National Land Use Databank, at 12.8% of its total land mass, it has marginally less than the South East and North West. Unsurprisingly, industrial sites fare worst for contamination.
In the rush to snap up land, this can be overlooked, says Pawlyn. With growing pressure on land and rising capital values, investors are chasing every contaminated site. “Some of the most heinous crimes are in corporate takeovers, where buyers are rushing in to make a deal and there is not enough due diligence on the property,” he says.
Finding out the true cost of dealing with contaminated land is difficult. Agents remain wary of putting generalised figures to specific problems. But a study carried out by Defra in 2003 showed that up to a quarter of houses built on contaminated land sold for up to 40% less than similar properties on cleaner land.
The issue is beginning to affect the willingness of banks to lend. US banks and credit agencies are now getting accurate risk assessments on contaminated land, says Pawlyn. “That is leading people such as Credit Suisse and GMAC to take a long, hard look at their loan books,” he says. “A lot of the grade A banks are not buying into schemes on contaminated land. They see no point developing an office building if it is eventually going to knock the yield not unless the land has a clean bill of health.”
Naive investors
UK finance houses are also looking more closely at their own contamination risks. “I’m not saying that Yorkshire sites are unlettable or unsellable, but that people are getting a much better understanding and factoring it into the acquisition,” says Pawlyn
But not all buyers are as sophisticated as the big banks. As property becomes increasingly attractive to so-called naive investors, more are at risk of making a loss.
“It used to be the case that people would bandy around numbers and just knock £1m off the price tag if land was contaminated,” says Paul Connell, associate director at environmental consultancy WSP Environmental in Leeds.
He adds that, on top of the extra expense of building on contaminated land, the increased costs associated with the tightening of waste regulations must also be accounted for.
“We’ve seen people buy and then assess the risks, sure that rising returns and property values would smooth out the bumps,” he says. “Now that the market is tightening, that comfort blanket just isn’t there. Cannier developers are recognising they can negotiate the abnormals and life-cycle costs into the sale price, but there are still those saying ‘to hell with it’, and that’s when you see these properties wrapped up into a dog portfolio and rebadged as ‘regeneration’ portfolios.”
Such an ugly picture of the industry is not, however, recognised by some. Simon Peters, regional director at Langtree’s east division, is one. “We sold a portfolio of half-a-dozen business parks to a major investor a couple of months ago, and I certainly wouldn’t take the view that it skimped on due diligence,” he says. “We just haven’t seen that within the industry.”
Extended programme
Peters admits, however, that to make the sums add up, public sector support is vital. Network Space, a joint venture between Langtree and English Partnerships, recently achieved its original remit, completing 500,000 sq ft of workspace on 18 former coalfields, 11 of them in Yorkshire. It is about to start work on an extended programme of 200,000 sq ft over the next two years.
Peters says: “The research doesn’t put us off development on brownfield, but EP’s involvement has been key. We couldn’t have developed it without them. It wouldn’t have been viable. The costs would have exceeded the value.”
At least two sources of this public sector funding Objective One and Objective Two are drying up as accession countries take more of the EU resources.
“It is going to result in a reduction of speculative development,” says Peters. “Much of the development we’ve seen recently has only occurred because of the funding available, and we’ll see a shortage of good-quality workspace until rents increase to close the gap.”
Mark Hosea, associate director at Lambert Smith Hampton’s regeneration division, agrees. “At some point, any contaminated site will become viable, but, more often than not, public policy and guidance needs to come into play and reduce the intrinsic risk,” he says. “If you are going to develop and maintain a scheme, you can look at life-cycle costs over 30 years, but most developers want to build and dispose, get their 15%-20% and get out.”
Hosea adds: “The big fear is that the new enterprise funding will be pigeon-holed and won’t be able to fund city-centre infrastructure to deal with increases in footfall, waste disposal and water.”
Developing on contaminated land has never been easy. And, as the government increases the pressure to build on brownfield sites, it seems contaminated sites are getting even more complicated and more costly.
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Landmark’s report surveyed six categories of contamination landfill, radon, flooding, subsidence, coal and pollution |
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Landmark Information Group’s Enviroscreen report looks at potential environmental risk to a commercial property to within 100m of its boundary. The average baseline is the nationwide average of the percentage of properties at risk from contamination. As a measure of the effectiveness of its service, Landmark says that the Law Society in February added to its warning card to solicitors that they should refer to Landmark’s environmental reports before they embark on a property transaction. |
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Source: Landmark Information Group’s Environscreen report |
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According to Landmark Information Group, two-thirds of surveyors are leaving themselves exposed to legal action when it comes to dealing with environmental issues. Landmark’s Envirosearch report found that just over 66% of surveyors say they rely on caveats in their valuations when dealing with environmental issues, despite the RICS in 2003 describing such practices as “potentially unsafe and professionally inappropriate”. The risk has been thrust into the limelight following a recent High Court ruling that made it clear that developers could be liable for cleaning up contaminated land. The Bawtry case R (on the application of National Grid Gas plc) v Environment Agency [2006] EWHC 1083 involved a former gasworks site developed for housing in 1965 which was only recently found to be contaminated. The judge ruled that the housebuilder would have been liable for the clean-up had it not long gone out of existence. Liability has since fallen to National Grid Gas, the current site owner. Costs will run into millions of pounds. This is only the second major case to be considered under Part 2A of the Environmental Protection Act 1990, so should the industry be concerned? Andrew Wiseman, head of environmental law at Trowers Hamlin is in no doubt: “It’s a significant ruling, with far-reaching implications for the commercial property industry, utilities and local authorities.” He is backed, perhaps unsurprisingly, by Richard Pawlyn, Landmark’s managing director of property and environment. “If you are a surveyor doing a valuation and not doing screening, you can’t rely on a caveat,” he says, adding: “If it wasn’t an issue, why has RICS changed its Red Book?” Yet not all commentators agree with Wiseman and Pawlyn. Paul Connell, associate director and business unit manager for environmental consultancy WSP Environmental in Leeds, believes the Bawtry case involved a former nationalised site, and was a specific case with a unique set of circumstances. “It’s not going to cause a huge change to the industry and you can get insurance and liability transfer products,” he says. Some go further, believing the ruling could indeed be positive for brownfield development. Mark Hosea, associate director at Lambert Smith Hampton’s regeneration division, says: “Legislation and cost implications will drive this. Future brownfield land could and should be less affected, as current users should be taking the clean-up costs into account as a determinant factor in their operational costs, and preparing funds for clean-up as part of the polluter pays principle.” |
