by Christopher Hedley
“The planner is the developer’s best friend” is a saying that has been true for most of the post-war period, perhaps never more so than when George Brown introduced office development permits in the mid-1960s. In this article, I want to demonstrate that this is no longer the case, that the Government has deliberately implemented a laissez-faire planning policy and that this policy will have far-reaching consequences for the business space market: for occupiers, for developers and for investors.
Government planning policy
The general philosophy of this Government towards planning policy has been succinctly laid out in Planning Policy Guidance Note 1. A deliberate presumption in favour of development is quite clear:
The planning system fails in its function whenever it prevents, inhibits or delays development which can be reasonably permitted. There is always a presumption in favour of allowing applications for development, having regard to all material considerations, unless that development would cause demonstrable harm to interests of acknowledged importance. [Except in the Green Belt] … the developer is not required to prove the case for the development he proposes to carry out; if the planning authority consider it necessary to refuse planning permission, the onus is on them to demonstrate clearly why the development cannot be permitted. (para 15)
Para 23 refutes the line taken by many planning authorities in the past on speculative development:
… it is not the function of the planning system to interfere with or inhibit competition between users and investors in land, or to regulate the overall provision and character of space for particular uses for other than land-use planning reasons. Where development is acceptable in land-use planning terms, it is up to landowners, developers and tenants to decide whether to proceed with it.
Planning Policy Guidance Note 4 goes further by asking that planning authorities should take a positive attitude to development control decisions “for any purpose relevant to economic prosperity”.
It also requires that the economic effects of refusal be taken into account and states that there will seldom be any justification for speculative development to be refused on the grounds purely that it is speculative.
Legislative changes
The Government’s drive towards the relaxation of the planning system was best exemplified by the Use Classes Order (UCO) of 1987.
The momentum behind the UCO was made greater by the amendment of the General Development Order in 1988. Among other changes, the 1988 GDO allowed free transfer from B2 (general industrial) to the general business use class.
Signs of change
The new Secretary of State for the Environment’s first major planning decision was at Foxley Wood. Although this is not strictly relevant to commercial development, the decision did question two long-established concepts.
One of them, the presumption in favour of residential development, is no longer to be taken for granted. Mr Patten stated at the time in his press release: “we are not in the business of sacrificing environmental quality to sheer housing numbers”.
There are also hints that the Government seems to be coming round to accepting a distinction between categories (a), (b), and (c) within the B1 use class. The Government appears to be worried about the loss of industrial space and the amenity implications of free transfer of use. The amendments to the Surrey Structure Plan, for example, accept that different sections of the B1 class will require a different approach from the local planning authority. Moreover, the Government has decided to commission a study of the effect of the Use Classes Order. And, a draft guidance note on structure plans also implies a reversal of the previous laissez-faire policy.
Local authority attitudes
Most local authorities do not like the new UCO; their planning policies are left in disarray, not being able to control different types of development. But in practice, attitudes have ranged from the acquiescent to the confrontational.
No authority has fought harder than Spelthorne, which has led the fight against the UCO. Spelthorne has argued the amenity test — in terms of the effect on any residential area. Traffic generation for offices of more than 2,500 sq ft fails the amenity test in Spelthorne’s terms.
Recently Spelthorne has lost its Use Classes case in a series of planning appeal decisions, although it did secure the right to impose very strict car parking standards.
Other local authorities tried to reclassify light-industrial use to B2 to stop wholesale changes to office use in their respective areas, but the GDO changes scuppered this attempt to get round the effects of the UCO.
The provision of car parking is often at the heart of authorities’ concerns. Some authorities insist on the full car park provision for B1 assuming the most intensive use of the site, which is logical considering the flexibility inherent within the use class.
Local authorities distinguish between industrial and office policies. Typically, in the more prosperous parts of the country, they would protect existing industrial space and promote its new development.
In contrast, office development would be restricted, especially if existing industrial space is threatened. This is justified partly to protect blue-collar employment and for questionable reasons of social balance. The introduction of the UCO clearly hinders the authorities from doing this.
Warehousing is largely treated with disdain except by a few authorities, for reasons which include low employment densities (but this is questionable), high traffic generation, visual impact, and (implicitly) because it is perceived to be down-market.
There are well-known and clear regional differences in approach to business space development.
Planning permission has been much easier to obtain in the North because of the more positive attitude towards economic development and employment creation, and also because of the much lower development pressures on land.
Development control statistics
So much for the policy; what has been the effect? The chart above shows that the number of major office permissions doubled between 1982-83 and 1988. The number of major industrial and warehousing schemes rose by 50% over the same period. In contrast, planning permissions for smaller schemes, less than 1,000 m2, rose only by about 25% over the same period.
At the very least, the Government’s planning policy has facilitated this huge expansion. Data on average size of scheme approved are not available from the official statistics, but there is every indication that this has also increased markedly with the coming of large out-of-town-centre parks.
How much floorspace?
The result of the planning relaxation is to be seen in the business park pipeline. There is a potential of about 185m sq ft in 114 schemes capable of delivering over 1m sq ft. About 90m sq ft of this total area already has planning permission, and a significant proportion of the rest of it would ultimately get permission if the applications are pursued.
There is no point in getting too excited over the exact figures of space in the pipeline, owing to uncertainty about whether the space will be built. In total, there is well over 200m sq ft of business park development proposed — most of this, of course, is currently conceived of as offices. The market is still young; between 25m and 35m sq ft has been completed so far, depending on the definition used. The annual take-up rate, again depending on the definition, is probably around 10m sq ft per year.
Can this space be absorbed?
Taking a figure of 200m sq ft for the purposes of analysis, could this amount of space be absorbed?
These figures should be viewed against the (admittedly suspect) figure of total office stock in England in 1986 of about 550m sq ft. The increase seems dramatic, especially since town-centre and London schemes have been excluded and very little of the pipeline involves demolition of existing space.
Assuming an average rent of £15 per sq ft and a yield of 8%, 200m sq ft of office space would represent about £37.5bn worth of investment. How would this space be financed?
Current net institutional investment is running at £1.35bn per year: even total new purchases are running at only £5.75bn per year, and, unless substantial assets are to be sold, there seems little prospect of offloading much of this space to the institutions.
Bank lending has almost reached the £30bn level — and the Bank of England is concerned about exposure to debt in some cases. Its Governor has also stated: “There must be room for debate about whether there will be sufficient demand in the early 1990s for the supply coming on stream. “Much of the £30bn is tied into central London projects, but, nevertheless, banks will wish to feel reassured about committing money to new schemes.
With business park demand in the order of 10m sq ft per year, the magnitude of floorspace also looks extravagant from the letting point of view.
Examining the proposals from the perspective of labour supply produces the same answer. At 200 sq ft per person, a pipeline of 200m sq ft would imply an extra labour force of 1m people. This implies either gross disruption to existing firms in the areas where the new development occurs, or London-style long-distance commuting.
How will it work in practice?
The scenario outlined above appears impossible. The key point about the supply “pipeline” is that a large proportion of it will not be built unless the demand materialises. Many schemes are designed in phases, enabling developers or investors to limit exposure at any time: the commitment is therefore limited.
Many schemes which are now designated as business parks will eventually be mixed office and industrial or warehousing developments. (Indeed, there are good grounds to believe that this type of development should be planned as such from the inception of a scheme.) Again, the amount of competitive office space coming through in the form of completed buildings is reduced.
Another factor is that many of the schemes are no more than tentative suggestions at this stage, even though some have planning permission. The schemes which are now well advanced are very much more likely to succeed.
The British development industry has always prided itself on its self-discipline; it will be interesting to see whether this is so. Barclays de Zoete Wedd recently pointed out that developers who have bought sites will be committed to going ahead with the scheme, since they will be absorbing high interest charges. While there is some force in this argument, developers will need to get the funds from somewhere and are going to have to make a case to a bank or institution that their particular scheme will prosper owing to relatively good local supply conditions or of higher intrinsic qualities.
Each potential business park needs to be seen against the backdrop of supply and demand for space, not only in the national context but also in the local and regional markets. Many schemes, although hoping for a major national relocation, will have to depend on shorter distance moves by local and regional organisations.
In individual places past take-up may be a poor illustration of the ability of the location to absorb the new space. In the past the space may not have existed to allow the demand to be manifested.
More choice
No one knows how much space will be built. Under any scenario, however, it is certain that the occupier will have considerably more choice than in the past five years.
This level of choice will work wonders on the property industry. The principal effect will be to distinguish between building products which attract the market and those which do not. In other words, although good schemes will succeed, others will not — and deservedly so. Too often in the past the occupier has had next to no choice and poor buildings have been let at good rents: this has not been good for the development industry.
Schemes will compete more on their merits. This will mean that they will have to be distinguished from each other in some way to attract occupiers. Serious market research is required to establish how this should be done.
Projects will have to be closely tailored to specific markets. Rubber stamping successful M4 corridor developments is not the route to success elsewhere in the country — or even in the M4 corridor itself a year or more later.
The quality of environment, the quality of the buildings and particularly the quality of the central services will be critical to the success of a business park scheme. This does not necessarily imply that high quality will always win out, more that value for money will be vital.
Moreover, high quality is not necessarily obtained through massive expenditure on buildings; in many cases it will be the result of considerable thought.
The tenant’s ability to choose has big implications for funding. Investors will have to be selective and take a good deal of care in choosing the right scheme, although there will still be plenty of good investment opportunities.
The process of choice may well affect leases. With the tenants having more bargaining power, overseas-headquartered tenants, for example, would like to take the opportunity of introducing shorter leases. The increasing presence of overseas developers and investors is starting to speed up this process.
Rental growth and yields
The probable consequence of a large amount of space coming on stream is the dilution of rental growth, but much will depend on underlying economic conditions, however.
One feature of the changing market, I believe, is that the well-conceived development will enjoy substantially better rental levels and growth than one which does not satisfy market requirements.
In addition to rent, landlords will have to pay special attention to the amount of money they can earn from offering services. It is not just the ownership of bricks and mortar which gives the opportunity for income flow.
Another result of the extra choice is that yields on many office investments are also likely to soften.
Industrial and warehousing yields have firmer defensive qualities in many respects, primarily because of supply side arguments.
Conclusions
It is not possible to be specific about the exact influence of planning on the supply pipeline. However, the emergence of the relaxed attitude to development allied to the changes in the UCO has certainly facilitated a large potential increase in the amount of space coming on stream.
The fact that there seems to be a new mood running through Marsham Street is too late for the first half of the 1990s.
Whether planning policy will be reversed by Mr Patten remains to be seen; certainly the change would have to be dramatic to have an appreciable effect.
Despite all this, I am by no means pessimistic about the future of office development in Britain. The potential space will not all be built, and well-conceived schemes delivering value for money will do well. There are also many interesting possibilities in the distribution and industrial shed sectors.
But both developers and investors will have to come to terms with the fact that for the next few years at least the occupier will have the last say. This will require a much better understanding of what the occupiers want than has been customary in the past.
