There is – within zones 1 and 2 in London – enough developable space to accommodate over 40,000 new homes – but this is not a proposal to concrete over Hyde Park, writes Peter Birkett.
Knight Frank has recently launched its Skyward report, using 3D spatial data from the Ordnance Survey, to identify the potential for roofspace development. This has shown enormous opportunities that mirror a growing interest in the possibility of building upwards.
Linking this analysis with constraints such as listed building designations has shown the range and number of available opportunities, identifying development sites that show the necessary values to reward those with the skills and experience to take on what is still a novel form of construction.
It is the value element that has drawn the focus towards central London, but capitalising on these high value sites is not for the faint hearted or novice. Roofspace development presents many significant obstacles, and developers will require a broad skill set and rugged determination.
Our experience has shown us that techniques and approaches to answer the many and varied complexities that arise are required. Typical issues encountered during this type of development include:
Funder insistence that the developer has a property interest
Historically, lenders would provide development funding on the basis of a contract, but modern capitalisation requirements make that untenable; the developer must have either a freehold or leasehold title in the site.
Leases can be granted to address this but will vary from standard provisions, as they must permit development within constraints that anticipate the process of design and construction.
An added complication is the removal of this airspace lease when the occupational leases are granted.
Statutory protection for tenants
Whether the developer has a freehold or leasehold interest, the statutory tenant protections can interfere with the development process.
Grant of an airspace lease will be a disposal that triggers tenant rights of pre-emption, but appropriate notices and use of tenant waivers of those rights can allow developments to proceed.
Even if the developer has a freehold interest, tenant rights of collective enfranchisement will apply and, if used, can frustrate development or take the benefit of the enhanced worth attributable to the development without necessarily paying full value. As a result, the grant of lease is the normal approach but, as mentioned, that brings its own issues.
Residential leases always contain a covenant from the landlord allowing the tenant the right to “quiet enjoyment”, which is essentially the peaceful use of their property. Turning an estate into a building site will directly challenge that right.
Tax issues
Care has to be taken over the extent and nature of the developer’s obligations so that the development itself does not become part of consideration for the grant of the development lease.
Costs incurred on new-build residential property will be subject to VAT recovery as the final product is zero rated, but the costs for a new development can often be more complex than that.
In addition to the new premises, there may be costs incurred on adding to existing facilities, such as lifts that may be extended to new upper storeys, and other costs, such as general refurbishment required to bring the whole property up to the standard required to market new (and relatively expensive) accommodation.
Handling the VAT treatment of these elements is difficult and can be dependent on the extent to which the developer is required to carry out the work or merely has the option to do so.
Contractual liability for the work
Landlords and management companies responsible for building maintenance will want to make sure that any damage caused during the course of development or as a result of defective work or materials is made good. A full set of collateral warranties or third-party rights in their favour will generally be appropriate.
Tenants may also want direct rights of action, particularly if they have flats on the existing top floor and will therefore be directly affected by any problems with the new construction.
Resident input
How the finished development will look may not perhaps be the most important legal issue, though it will be a significant issue for the tenants since it is the one element that will they will have to live with.
Developers need flexibility to accommodate planning authority requirements, but it may be appropriate to agree parameters with the tenants so that there is an active dialogue rather than a unilateral imposition.
Developers will also need to give thought to the protection of the residents’ long-term interest in the building to ensure structural integrity and effective management.
In addition to collateral warranties, the design and structural issues can have long term effects on maintenance. As an example, installation of new lifts may add to the service charge requirements. Although the new dwellings will increase the base of contributions, the weighting of service charge calculations may have to be adjusted overall.
Realisation of value
The developer is acquiring development “land” in the sense that there is a plot on which development can be carried out, and the grant of planning permission will crystallise a significant uplift in value.
The calculation of that value and the division between the developer, the freeholder and the tenants is a source of potential conflict, as is the means by which payment is secured. Payment for the grant of an airspace lease is only one of a number of trigger points for realisation of value so in addition there could also be an overage structure to share in market driven profit or enhanced planning permission.
External appearance
Developers will need to give serious thought to the harmonisation of the external appearance of the remainder of the building and provision of modern specification services.
Works can include entry phones, broadband and modern heating and lighting systems utilising renewable energy sources to the benefit of the tenants.
While it may appear counter-intuitive to think that a tenant would turn down free enhancements, the disruption that might arise is a valid consideration and it may be that modest improvements in the cosmetic condition of the property are not a sufficient incentive to persuade residents to cooperate.
In some cases, tenants may have no choice, for example, if the developer plans to replace windows that are not included in the demise, but if the windows belong to the tenant they may resist the disturbance that comes from installing replacements. New services would generally have to be installed without passing through existing flats.
A successful scheme can release significant value for all concerned and generate the financial resources to carry out major refurbishment of an entire block or estate without the need for residents to contribute.
Freeholders or head lessees may be able to tap into value that far exceeds the worth of their reversionary interest and the overall benefit can be substantial.
Peter Birkett is a senior associate in the real estate team at Howard Kennedy
Digital mapping will deliver new homes
Digital mapping technology continues to transform urban planning, with policymakers becoming accustomed to a higher standard of evidence across a range of information themes, writes Ian McGuinness.
From local authorities to the wider commercial property industry, geospatial science has evolved from a software-focused capture and classification tool to a collection of technologies, common standards and richly attributed data that offers an entirely new way of approaching and solving problems.
Behind this transformation is a cross-industry cohort of human and physical geographers, recognised as a distinct professional group by both the Royal Institution of Chartered Surveyors and the Royal Geographical Society.
Knight Frank’s Skyward analysis is another example of how linked public and private sector geospatial data can provide new understanding in an area of planning debate.
The research makes clear that infill and intensification within existing 3D street block envelopes can realise significant development potential without affecting London’s unique character, and 40,000 homes could sit in the voids created by London’s uneven rooflines.
An anecdotal appraisal of this opportunity can be made by walking down many of central London’s streets.
But the strategic knowledge underpinning delivery – such as which neighbourhoods offer the most volume, how much the added development is worth and which freeholders are best placed to realise it – can only be determined through geospatial analysis.
The good news for planning authorities and other players in the market is that a key source dataset from Ordnance Survey used in the Skyward analysis will be opened up to wider industry use as part of the proposal for a new government Geospatial Data Commission announced in the Budget.
This will remove obstacles to organisations sharing both the data and ideas behind this research, and set the groundwork for a refined industry-wide view of how areas of constraint and opportunity are identified through collaborative geospatial analysis.
Ian McGuinness is head of geospatial at Knight Frank