Pinsent Masons

Operational delivery ‘key to return on investment’ for Build to Rent in Scotland

A build to rent project is underway at Edinburgh's Fountainbridge

A build to rent project is underway at Edinburgh’s Fountainbridge

Investors into Scotland’s Build to Rent (BTR) sector have been urged to ensure that schemes have operational management factored in from the earliest stages of development.

A new report from residential property management company FirstPort is based on a roundtable meeting involving some of Scotland’s major players in industry and representatives of government.

With significant government backing, the hope is that BTR will attract £500 million of investment and deliver 2,500 private rental homes by 2020 to help address the housing shortage in Scotland.

But, according to Build to Rent in Scotland: Getting it right, across the UK the BTR sector has so far faced challenges establishing itself as a significant element of the housing market.

FirstPort business development manager, Jeremy Ogborne, said: “Build to Rent in Scotland: Getting it right addresses some of the barriers that have slowed investment and delivery in the BTR sector.  The report argues that securing the confidence of investors, of government, and of customers, is key, and that ensuring how the building will operate and serve its local market should be planned in from the beginning.

“The key message is that, in the end, the quality of operational delivery will define a development and the customer experience. In the everyday life of a development it is going to make the difference between efficient and high-quality amenities versus amenities which are disused or deteriorating; the difference between a vibrant community in which residents feel they belong, versus one with dissatisfied, disengaged customers.

“Operational delivery is absolutely key to providing a healthy return on investment for the long-term, reducing customer churn, and maintaining a premium look and feel.

“If a development treats this as an afterthought then it is going to struggle to remain viable, as some BTR developments currently are. There are very few managing agents in the market with the scale necessary to perform this role.

“Now the Scottish Government is calling on the sector to deliver, and with operational expertise, management information and an experienced, skilled workforce all factored in from day one, it can do so.”

Build to Rent in Scotland: Getting it right includes input from Homes for Scotland, Pinsent Masons LLP, the Scottish Futures Trust, the Scottish Property Federation, Montagu Evans, the EDI Group and representatives of the Scottish Government.

New legislation ‘likely’ after landmark Supreme Court ruling

Gary McGovern

Gary McGovern

Yesterday’s landmark Supreme Court ruling in favour of Elsick Development Company (Elsick) against Aberdeen City and Shire Strategic Development Planning Authority could shape legislation in the upcoming Planning Bill, according to law firm Pinsent Masons.

Elsick had applied for planning consent to develop approximately 4,000 houses together with commercial, retail and community facilities at Elsick, near Stonehaven.

The Court found that the local authority had no powers to compel Elsick to make a financial contribution to a pooled fund to be spent on infrastructure as a condition of the planning approval.

Elsick argued that the local authority was acting contrary to the guidance of Scottish Ministers on planning obligations and that the contribution they were being asked to make to the pooled fund was out of all proportion to the demands its development would make on the local infrastructure.

In dismissing the local authority’s appeal against an earlier decision by the Inner House, Lord Hodge said: “If planning authorities in Scotland wish to establish a local development land levy in order to facilitate development, legislation is needed to empower them to do so.”

Planning expert at Pinsent Masons, Gary McGovern, believes the judgement will add pressure on the Scottish Government to change planning rules which require developers to pay towards local infrastructure.

He said: “This was a high profile and important case in a financial sense.

“On the one hand it has the potential to affect the scale of contributions developers are liable to pay from a range of developments across the authority area, and on the other, to curtail the monies received by the authority to invest in strategic transport infrastructure interventions.

“In this case, the impact of the development on the infrastructure for which the contributions were sought was trivial and too remote to be a relevant to the development in question and form the basis of a planning obligation. This echoes many previous UK court decisions on the scope of planning obligations.

“The outcome had to some extent been pre-empted by the Scottish Government’s clear signal of intent to include a power on the face of the imminent Planning Bill enabling the introduction of an infrastructure levy in Scotland.

“In this regard, the Scottish Government will note the Supreme Court found that if there are seen to be merits to a ‘local land development levy’ system, legislation is required to implement such a system, as we have seen already in England and Wales in the form of the Community Infrastructure Levy. The decision of the Supreme Court essentially follows conventional planning wisdom and to that extent was largely predictable.”

Pinsent Masons partner Craig Connal, QC, added: “The re-assertion and re-emphasis of traditional rules linking requirements with the individual scheme is to be welcomed, in part because any weakening of its rigours runs the risk of parties – on either side – bending or trying to bend the rules by which all are otherwise compelled to play on level playing field – especially where the stakes may be high enough to persuade parties to take a line of least resistance.

“Views can legitimately differ on the merits of a regional or national infrastructure levy – some will say it makes for certainty and cuts cost, others that it is unfair by making a developer pay for something which is nothing to do with their development at all. The proper place for that debate is in legislation where the boundaries and constraints of any scheme can be debated.”

Planning gain ‘holidays’ could stimulate stalled building projects, says property lawyer

Rodney Whyte

Rodney Whyte

A property lawyer has called on local authorities to offer ‘planning gain holidays’ to revive stalled commercial and housing developments.

Rodney Whyte, a partner in Pinsent Masons in Aberdeen, said planning chiefs could revive developments which have been put on ice by relaxing rules on the planning gain contributions builders sign up to.

It has been accepted practice that to obtain planning approval on housing, and to a lesser extent commercial development projects, that developers must agree to provide Planning Gain.

These Developer’s Contributions, as they are also known, could be in the form of funding facilities at a local school, supporting a community initiative or paying for associated local infrastructure.

Real estate expert Rodney Whyte said: “The appointment last week of Henry Boot Developments to build the new £333 million Aberdeen Exhibition Centre is a welcome step forward, while the AWPR project continues apace and the £410 million Aberdeen Harbour extension (both of which Pinsent Masons acted on) are all superb platforms for growth and will aid diversification of the North East economy.

“However, the local construction and development industry continues to face significant challenges. Workflow is patchy, construction costs continue to rise and margins are under pressure.”

Whyte called on local authorities in Aberdeen City and Aberdeenshire to review how they are handling current planning applications and to play their part in boosting the local economy.

He added: “A sensible initiative would be for planning departments to take a fresh approach to residential and commercial developments which are in the pipeline. In this period of localised ‘market failure’ they have a crucial role to play in championing bold and innovate ways of making sure new planning applications have the best possible chance of viability and success.

“Planning officials should revisit existing ‘planning gain’ packages which have been previously negotiated, but which post oil-price slump and post-Brexit vote, may have caused developers to think again and to ‘put on ice’ certain projects.

“Planning gain may be a laudable and well accepted practice when markets are in a position to deliver a development that can meet these contributions, but if they become a burden which makes a development unsustainable, then no party gains.

“It could be that ‘planning gain holidays’ need to be introduced to encourage developments to proceed, but which also protect a council’s position and contain suitable clawback arrangements if and when there is a return to ‘normal’ market conditions.”

Increased council tax or rates revenue, job creation and promoting the North East as a vibrant and diverse place to live and work, would be just some of the benefits of such an approach, claimed Whyte.

‘UK Renewables Industry could benefit from Brexit double boost’

pinsetmasonsThe UK’s renewable industry could receive a dual boost from Brexit, according to planning experts at legal firm Pinsent Masons.

Over-regulation which stifles new onshore and offshore wind developments could be watered down, while removing State Aid rules could encourage greater manufacturing of the infrastructure required for renewable projects, the lawyer said.

Pinsent Masons partner and planning specialist, Jennifer Ballantyne, said Brexit threw up a number of positives and negatives.

She said: “There is good and bad for the renewables industry in terms of the UK’s current relationship with the EU.

She added: “The bad is that some segments of the market – for instance onshore and offshore wind – are over-regulated. The EU imposes particular requirements which means the development process needs to be conducted in a particular way and a whole load of constraints and extra costs are introduced.

“The clearest example is the designation of environmentally protected areas, some of which are in exactly the sort of places where one would want to build onshore or offshore wind farms. Some in the UK have never been convinced by the science that underpins those designations and concerns have been expressed that designations are politically motivated.

“Forward-thinking developers may already be reviewing their thinking around areas currently designated or proposed for designation as having EU protection on environmental grounds. If there is a relaxation at a UK level that could be both commercially significant and controversial.”

Pinsent Masons also highlighted that the removal of restrictive State Aid rules could have a significant impact on the industry, while a new trade relationship could transform the profile of players in the UK wind sector.

Partner Gary McGovern said: “State Aid rules which impose a requirement to maintain a level playing field could be gone and so create new opportunities.

“For instance, a live issue currently is whether proposals to allow onshore wind projects on the Scottish Islands to retain access to the Contracts for Difference regime would fall foul of State Aid rules if at the same time mainland wind projects are excluded.

“There could also be selective interventions to stimulate UK renewables manufacturing. All the major kit for renewable infrastructure is procured from continental Europe as there is little manufacturing base in the UK.

“There could be greater opportunity to stimulate that base through targeted action without fear of triggering State Aid rules, however there would be significant ground to be made up.”

However, McGovern said there would be heightened concern that Brexit would make the UK renewables a less attractive option for European investors.

He added: “It’s striking that much of the current investment and financing for renewables comes from outside the UK, and a significant proportion of the major players in UK renewables are owned by European parents. For those subsidiaries of European businesses, or those reliant upon foreign investment, there will be concern over potential trade barriers which could make the UK a less attractive investment proposition.”

Chinese investment could boost fund major Scottish construction projects

Michael Watson

Michael Watson

Moves by Chancellor George Osborne to encourage Chinese involvement in the HS2 high speed rail project could pave the way for foreign investment into key Scottish infrastructure projects, according to an infrastructure and projects lawyer.

The Chancellor spent much of last week in China to try and attract investors there to bid for seven contracts worth £11.8 billion in total covering the first phase of HS2, between London and Birmingham.

Michael Watson from Pinsent Masons said the visit could also have a knock-on impact for projects north of the Border such as road upgrading and connecting offshore wind farms to the grid but only if Scotland is able to present an attractive investment proposition for the Chinese.

He said success in getting the cash-rich Chinese to support energy, transport and manufacturing projects, depended on offering up schemes which are large enough in scale and which are at an advanced planning stage.

“The Chinese tend to look for fairly substantial transactions to invest in, so they can deploy significant amounts of capital and create openings for their supply chain, technology and manpower to help build these assets,” Watson told The Scotsman.

A report by the law firm and the Centre for Economics and Business Research (CEBR), published last year, had suggested that China is set to invest £105 billion into UK infrastructure  by 2025 with the energy, real estate and transport sectors the leading recipients.

“There is no reason why Scotland should not get its fair share,” added Watson. “Indeed the current turmoil in the domestic Chinese markets create further opportunities for Scotland and the UK – where Chinese investors can turn to, seeking more stable and predictable returns in infrastructure investments.”

Watson said he was upbeat about the combined efforts of the Scottish Government, Scottish Futures Trust and Transport Scotland to attract overseas investors in large infrastructure projects.

He said: “There has been a concerted effort from Scotland to attract investment from China and this could be a game-changer for Scottish infrastructure, but only if we can provide suitable projects of the scale and appropriate level of readiness which would appeal to investors.

“In order to do that we have to have ‘investable’ projects and that means taking these schemes to a stage of development where planning, structure and consent is in place. The key is to have projects which are visible, well developed and ready to be invested in, because we are competing in an extremely competitive global market and the Chinese and other overseas investors have a wealth of options on where to put their money.”

Projects of sufficient scale which could interest Chinese investors, according to Watson, include the A9 Perth to Inverness dualling project and rail electrification programmes.

In the energy sector, updating ageing North Sea infrastructure and onshore and offshore power transmission and generation initiatives are other billion pound projects which may appeal.

“Scotland has a stable regulatory and political environment compared to most countries and relative to other parts of the UK it has had a more positive story to tell regarding infrastructure investment,” added Watson.

China set to invest over £100bn in UK infrastructure by 2025

Pinsent MasonsA report by international law firm Pinsent Masons and the Centre for Economics and Business Research (CEBR) has suggested that China is set to invest £105 billion into UK infrastructure  by 2025.

The report, ‘China Invests West: Can Chinese investment be a game-changer for UK infrastructure?, found that the energy, real estate and transport sectors will be the leading recipients.

The UK energy sector will be the biggest target for Chinese capital, with investment in projects including nuclear energy, wind power generation and photovoltaic power generation could be set to reach £43.5bn by 2025. The real estate and transport sectors could receive £36bn and £19bn respectively over the next decade.

Charles Davis, a director at CEBR, said: “Although the Chinese economy may be slowing this won’t stop it from becoming the largest economy in the world by 2030. Coming hand in hand with this is greater economic influence on the rest of the world as it looks to invest its ever-growing pile of savings. Our analysis shows that the UK is an increasingly attractive investment destination for China and we estimate that the UK will receive an estimated £105 billion investment in real estate and infrastructure up until 2025.”

Richard Laudy, head of infrastructure at Pinsent Masons, added: “As the need to modernise UK’s major infrastructure gets greater by the day, the projected influx of Chinese investment into UK infrastructure is expected to be a welcome boost to the construction industry in particular and UK economy as a whole. As a foreign investor China is going to become increasingly important for UK infrastructure by 2025.  This means UK-China partnerships need to grow over the next decade.

“Our report finds that this level of investment is going to be a game-changer for the UK infrastructure.  Over the past few years we have seen China’s role as an investor evolve from making indirect investments through sovereign wealth funds – Chinese businesses are now becoming co-funders, co-developers and co-contractors in major UK infrastructure projects.  We are already seeing this happen – for example, Beijing Construction Engineering Group making a major investment in Manchester Airport City.”

UK and Chinese business leaders consulted for the report are already seeing a clear rise in the number of joint-ventures between UK and Chinese firms, including one of the largest real-estate developments in the UK, Royal Albert Docks in East London and the transformative development at Nine Elms in Battersea.

Business leaders also believe that the energy sector is expected to see a continued increase in Chinese investment in projects including offshore wind farm development and other key renewable power networks. However, the report finds that this will pick up significant pace in the latter half of the forecast period.

The report finds that as much as £19bn will flow into transport such as roads, rail and airports. However, given the need to develop the current position in respect of policy on public ownership, planning policy and funding mechanisms, particularly in respect of project finance and investment returns and the restrictive effect that this can have on private investment, this investment is highly likely to come towards the end of the forecast period, in the 2020s.  Therefore, according to the research no immediate flow is expected into transport.

The report, in addition to identifying the level of Chinese investment capital projected into UK infrastructure over the next ten years, expects China to use its vast domestic manufacturing capability and capacity to export equipment and materials for UK infrastructure and real estate projects where it is providing investment.  This development is expected to change the landscape of the infrastructure industry in the UK as the Chinese enter the supply chain over the next ten years.

Richard said: “Over the coming decade, we expect a significant increase in direct investment from the Chinese coming through in the shape of joint-ventures and strategic alliances. Four out of five of the world’s largest construction and engineering companies are now Chinese with a growing appetite for infrastructure investment and with the potential to invest vast amounts of capital in advanced economies in Europe.

“Entry by China into the UK market will create significant sector opportunities to provide expertise on how to operate in the UK market effectively – from labour market regulations to the planning process and how to operate with the framework of EU regulations.

“However, with UK public finances still under pressure, uncertainty around government support for infrastructure is still a key concern for the infrastructure sector. If the UK wants to unlock Chinese investment to fill in the funding gap to modernise its aging infrastructure, the UK government will need to address issues around policy and further develop the pipeline for investment – delay and lack of clear commitment on policy will only create uncertainty for investors.

“Although, the flow of investment from China has already started – we expect this to be the beginning of a major trend as a trickle of major Chinese investment turns into a wave over the coming decade.”