Residential real estate in the UK

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1 Financial institutions Energy Infrastructure, mining and commodities Transport Technology and innovation Life sciences and healthcare Residential real estate in the UK Reassessing the sector and its capital flows

2 Norton Rose Fulbright Norton Rose Fulbright is a global legal practice. We provide the world s pre-eminent corporations and financial institutions with a full business law service. We have more than 3800 lawyers based in over 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia. Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare. Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact. Canada Calgary Montréal Ottawa Québec Toronto Europe Amsterdam Athens Brussels Frankfurt Hamburg London Milan Moscow Munich Paris Piraeus Warsaw USA Austin Dallas Denver Houston Los Angeles Minneapolis New York Pittsburgh- Southpointe San Antonio St Louis Washington DC Latin America Bogotá Caracas Rio de Janeiro Africa Bujumbura** Cape Town Casablanca Dar es Salaam Durban Harare** Johannesburg Kampala** Kazakhstan Almaty Middle East Abu Dhabi Bahrain Dubai Riyadh* Asia Bangkok Beijing Hong Kong Jakarta* Shanghai Singapore Tokyo Australia Brisbane Melbourne Perth Sydney *associate office **alliance Clear, commercial advice, provided within tight deadlines. Chambers UK, 2015 A well-regarded firm in the London investment and development market. Noted for high quality individual lawyers You re made to feel like their favourite client. You re made to feel special and that you are the only one. Chambers UK, 2014 Norton Rose Fulbright stands out for its professionalism and industry knowledge. Legal 500, Norton Rose Fulbright

3 Our approach to the residential sector Norton Rose Fulbright has a team of lawyers with the extensive skills and focus to advise on the UK s leading residential transactions. Our approach to the residential and mixed use sector combines the firm s strengths in real estate generally our global platform and reach, ability to deploy integrated teams of specialist lawyers with the particular requirements of the residential sector. We are able to advise on the specialist issues encountered in residential transactions rights to buy, rights of pre-emption, service charge protections as well as on complex issues that often arise on a development project or investment transaction. Our approach caters for the links between residential investment and development and related commercial property sub-sectors, such as student accommodation, build to rent and affordable housing. Unlocking value a selection of recent transactions The Heron, London Advising Heron International on the redevelopment of Milton Court, a new 36 storey tower which will house the Guildhall School of Music and Drama on the lower floors and luxury residential apartments on the higher floors. This is the largest residential development in the City for over 30 years. Battersea Power Station, London Acting for a joint venture, comprised of SP Setia Berhad, Sime Darby Berhad and the Employees Provident Fund of Malaysia, on the 400 million purchase of Battersea Power Station in London, its subsequent financing and the structuring of the legal ownership interests in the different phases of the development. The landmark 39 acre site is being redeveloped to provide 3,700 homes and other commercial and retail facilities. This was named deal of the year at the Property Awards Ivanhoé Cambridge Advising Ivanhoé Cambridge Residential in relation to their joint venture arrangements with Residential Land and affiliates of Apollo Global Management and subsequently advising the joint venture on the real estate and financing aspects of over 300 million of investments in prime residential properties in Central London. Ivanhoé Cambridge is one of the ten largest real estate companies in the world. Macquarie Capital Advising Australian Bank Macquarie Capital in relation to their involvement in the 2.5 billion Silvertown Quays development in London s Royal Docks. This mixed use regeneration scheme is to be developed by the Silvertown Partnership and will include business and leisure space as well as 1500 new homes on a brownfield site. Norton Rose Fulbright 03

4 Crest Nicholson Advising on the 2013 IPO for this major housebuilder in addition to representing it in environmental and health and safety matters on a number of residential schemes over many years. ABC International Bank Advising on the 400 million Islamic financing for the redevelopment and refurbishment for residential use of King s Reach Tower, Southbank, a joint venture between London developer CIT and Jadwa Investments. Al Faisal Holding Company Advising Al Faisal Holding Company, one of Qatar s largest private groups, on its purchase of the W Hotel in Central London for just under 200 million with financing provided by Qatar National Bank. The residential element of the transaction involved the creation of 11 luxury flats in addition to the acquisition of the hotel. 04 Norton Rose Fulbright

5 South Bank Tower (formerly King s Reach Tower) comprises 191 luxury residential apartments at the heart of London s South Bank. Norton Rose Fulbright acted on the Islamic financing for redevelopment as a residential land scheme. Norton Rose Fulbright 05

6 New patterns of residential investment, development and occupation The approach to the UK residential sector by investors, housebuilders and developers has changed significantly in recent years. The sector was not previously regarded as being an institutional asset class for a number of reasons, including the high levels of owner occupation and the corresponding difficulty for would be institutional landlords in acquiring rented product in sufficient scale. These supply side dynamics have, however, now begun to change, both with the recognition that a greater volume of new housing is required each year and the emergence of new occupational patterns witnessed by the development of serviced apartments, of student accommodation and the growth of the private and social rented sectors. New participants in the sector include UK and overseas based institutions, large international developers and other private equity investors who have not traditionally chosen to invest in residential real estate. Their interest has been aroused by a number of financial and commercial factors: Returns from residential investment and development (especially in London) remained strong throughout the recession, with residential asset values being supported by Government policies and initiatives such as quantitative easing and Help to Buy. Demand for residential property is driven by socio-economic and demographic changes and institutions are increasingly looking to acquire or develop large blocks of rented homes. By contrast, UK commercial property saw declines in capital values across a number of sub-markets during the recession and limited stock availability when investor demand returned. In London, a series of large regeneration schemes, each incorporating large elements of residential and mixed use development, have been built. On account of their scale such schemes can only be undertaken by very large, often international, investors and developers, as was the case for example with the redevelopment of Battersea Power Station. Over a similar time frame, the supply of new housing has remained low, creating upward pressure on prices. The reasons for this range from the initial financial problems experienced by many of the residential development companies to the difficulties for would be buyers in obtaining mortgage finance without committing larger deposits. As a result, there has been considerable expansion of interest in the Private Rental Sector, which looks set to continue as total returns are some of the highest in any UK real estate asset class. In addition, one theme that has been common across all investment activity in the sector has been the search by investors for income at a time when returns from traditional financial investments such as bonds have been at historic lows. In the residential sector this theme has been a major factor contributing to the development of a number of new sub-asset classes bearing strong income characteristics. These include multi family rental schemes through the expansion of build to rent as a product, and the maturing of student accommodation as a recognised mainstream investment. Similarly social housing with its long term cash flows has also grown significantly. 06 Norton Rose Fulbright

7 Limited supply and decreasing affordability have drawn attention to the large scale shortage of new housing. For example, The Mayor of London is on record as having said that some 400,000 new homes will need to be built in London alone over the next ten years. To achieve anything like that level, new methods of supply will need to be found and evidence can already be seen in the creation of large residential towers on brownfield land, particularly to the east of the City of London and in the Docklands. Such development is on a sufficient scale to be of interest to financial institutions and their participation in the sector should give rise to a significant extension to build to rent product. Likewise, the need for a large volume increase should see the creation of much more affordable housing. It seems clear that the residential sector will become a mainstream asset class for domestic and international companies, whether they be large scale developers or institutions whose interest lies principally in the long term deployment of significant amounts of capital. Partly on account of the scale of many such projects, joint venture arrangements between these groups will become increasingly common. Norton Rose Fulbright 07

8 Current issues in the residential sector As institutional investment and development patterns evolve, new technical and legal issues require resolution. Moreover, each scheme poses its own varied challenges. This is particularly so in recent years as a consequence of the global financial crisis and legislative reform introduced by the UK Coalition Government. We consider below some of the key issues which we are seeing in the current market which will affect those looking at the residential sector. Site assembly Assembling a site for a residential or mixed use development can be a complex and time consuming exercise giving rise to a number of legal issues. For example, who owns or has an interest in the site? Once identified, how will these interests be acquired? Will it be by direct acquisition, by a series of option arrangements or can some other method be used such as Compulsory Purchase powers? What rights of occupation exist and does a vacant possession strategy need to be put in place? What are the timing and cost implications of this, particularly if there are existing residential occupiers with protected rights? Lastly, from a more tactical perspective, how can the site assembler acquire the key elements of the site in a sufficiently low key fashion to avoid inflating the price of the remainder? Structuring Land Ownership An important consideration on any residential or mixed use investment or development scheme will be structuring the land ownership appropriately. In addition to usual tax considerations as to how to structure the transaction in the most efficient manner, there are also a number of specific statutory regimes which apply to residential property such as residential tenants pre-emption rights under the Landlord and Tenant Act 1987 relevant both in connection with the original acquisition and in advance of future dealings with the property. It is important to ensure that the initial structuring is correct so as to minimise issues for the future. Planning and the Community Infrastructure Levy The Community Infrastructure Levy (CIL) is a charge that local authorities in England and Wales can apply to developments in their area. The proceeds go towards investment in local infrastructure. The principle underlying the CIL is that developments require supporting infrastructure and it is appropriate for developers to bear some of the cost. This used to be one of the functions of section 106 agreements which were criticised for, amongst other things, a lack of transparency in respect of how proceeds were invested. The Localism Act 2011 was expected by many to do away with the CIL. However, the Coalition retained it, adding a requirement for CIL-charging authorities to pass money to other bodies, such as neighbourhood groups. The CIL is a particularly important consideration in the London development market, where not only will most boroughs charge the CIL to fund local infrastructure but, additionally, the Mayoral Community Infrastructure Levy is charged to fund Crossrail. The CIL applies to developments consented on or after the date upon which a charging schedule is adopted in a particular area (being 1 April 2012 in the case of the Mayoral CIL). 08 Norton Rose Fulbright

9 Energy efficiency and environmental issues Carbon reduction has been high on the political agenda for a number of years, resulting in a raft of legislation dealing with a developer s legal obligations in respect of new development. Buildings account for over 40% of all the UK s carbon emissions. One of the cornerstones of the carbon reduction policy is the requirement for all local planning authorities to ensure that all new buildings are zero carbon (meaning zero net emissions of carbon dioxide from all energy use over the course of a year) by 2016 (in the case of new homes) and 2019 (in the case of non-residential buildings) and are energy efficient. This presents design challenges to ensure fabric efficiency (to reduce the demand for carbon) and meeting energy demand with a low carbon solution. Local planning authorities may also require developers to meet the voluntary design and construction standards in the Code for Sustainable Homes as a condition of a planning permission. As regards environmental issues, construction generally is a high-risk sector in terms of potential liabilities arising from contaminated land and groundwater pollution risks. This is compounded when older structures are demolished by the added risk of historical contaminants in building materials such as asbestos, lead or mercury, substances which are now subject to strict regulatory regimes and need to be controlled and remediated carefully. Funding Whilst the quantum of available debt is now improving, obtaining finance for large or mixed use developments remains challenging, with a continuing funding gap caused by depressed levels of traditional bank lending and much greater attention being paid to the way in which the arrangements are structured and the security available to the bank. Because of this a number of other participants are entering the market with more innovative funding packages including stretched senior and mezzanine finance designed to fill the gap left by traditional debt finance. The expansion into the residential and mixed use sector of the leading UK and international institutions is likely to have a number of beneficial effects on the methods used to finance developments. In particular their tendency to inject relatively large elements of equity into transactions should ease their financing. A similar impact will occur if greater use is made of joint ventures with investment from overseas. We also anticipate increased levels of forward funding. This involves the sale of a bare site to a purchaser who will provide the developer with funding to finance the development of the site. An advantage of this approach is that, with appropriate structuring of the arrangements, the SDLT liability relates to the value of the bare site, rather than the completed development. Conversion of offices and retail property to residential use Primarily as a result of the rise in house prices in Central London, there was a trend in 2012 and 2013 for offices to be converted into residential flats. A number of financial and other factors come into play in any decision with viability often being driven by the location of the property and its relative value per square foot when used either as an office or for residential occupancy. However there are specific legal issues applicable to such situations, such as the relatively recently introduced Permitted Development Rights, careful navigation of which is required through the opt out / prior approval procedures. Planning permission is still required for physical alterations which materially affect the external appearance of the building. Norton Rose Fulbright 09

10 Our team In addition to understanding the legal issues involved, the value to our clients also lies in our knowledge of their business and in our ability to communicate key market issues. If you would like to discuss any of the above, or any other aspect of real estate development please contact a member of our team. Contacts Lindsay Morgan Partner, Real estate Tel +44 (0) lindsay.morgan@nortonrosefulbright.com David Hawkins Partner, Real estate Tel +44 (0) david.hawkins@nortonrosefulbright.com Dan Wagerfield Partner, Real estate Tel +44 (0) dan.wagerfield@nortonrosefulbright.com Duncan Field Partner, Planning Tel +44 (0) duncan.field@nortonrosefulbright.com Mark Lloyd Williams Partner, Corporate Tel +44 (0) mark.lloydwilliams@nortonrosefulbright.com Angela Savin Partner, Tax Tel +44 (0) angela.savin@nortonrosefulbright.com Sarah Cullen Partner, Real Estate finance Tel +44 (0) sarah.cullen@nortonrosefulbright.com 10 Norton Rose Fulbright

11 Battersea Power Station in London is a landmark 38 acre site being redeveloped to provide 3700 residential homes. Norton Rose Fulbright acted for the joint venture on its acquisition, the structuring of the legal ownership for the seven phases and subsequent development financing. Norton Rose Fulbright 11

12 nortonrosefulbright.com Norton Rose Fulbright Norton Rose Fulbright is a global law firm. We provide the world s preeminent corporations and financial institutions with a full business law service. We have more than 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia. Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare. Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact. Norton Rose Fulbright US LLP, Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP and Norton Rose Fulbright South Africa Inc are separate legal entities and all of them are members of Norton Rose Fulbright Verein, a Swiss verein. Norton Rose Fulbright Verein helps coordinate the activities of the members but does not itself provide legal services to clients. References to Norton Rose Fulbright, the law firm, and legal practice are to one or more of the Norton Rose Fulbright members or to one of their respective affiliates (together Norton Rose Fulbright entity/entities ). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a partner ) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of the relevant Norton Rose Fulbright entity. The purpose of this communication is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points of law discussed. You must take specific legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright. Norton Rose Fulbright LLP NRF /16 (UK) Extracts may be copied provided their source is acknowledged.