“Find Out Where the People Are Going and Buy the Land Before They Get There”
A legal update from DechertNovember 2015 “Find Out Where the People Are Going and Buy the Land Before They Get There”1
I was in New York with colleagues recently, answering clients’ questions about investing in UK real estate. As in the US, we in the UK have ridden a sustained period of strong capital growth in real estate, which continued into 2015. However, growth has slowed recently in certain areas and former hot-spots can now only be described as lukewarm.
London’s eminence as a commercial, educational and cultural world centre, and historically-reliable laws and democratic government, mean it remains a top investment destination for long-term stability - the so called “safe-haven” effect. In addition, the chronic under-supply of new homes, and influx of foreign cash buyers, “part-timers”, buy-to-letters and migrants (both from within the UK and global), in tandem with the basic laws of supply and demand, ensure that crashes are sustained for shorter periods than in other regions, and recoveries faster. For example, London prime property saw a shallower dip and a faster recovery than other, more liquid, investment assets after the crash of 2008.2
Against this backdrop it is not surprising that London competes with only New York as the top global city for investment in real estate.3 However, competition for prime, central London assets has naturally been reflected in prices. At the super-prime end, there is even evidence of some softening of the market.4 Where yields are a concern, investors are increasingly looking further afield, pushing into cheaper, “secondary” areas and, in this respect, the title quotation is as true today as when first spoken. The best investments are made by those who anticipate future demand. Or to quote another American hero, “Yesterday’s home runs don’t win today’s games.”5
A raft of new planning, tax and administrative legislation and other initiatives are changing the UK investment landscape. This year, the smart money in London has poured into real estate within easy reach of the 40 new stations proposed along the Crossrail route6, and the price uplift in these areas is predicted to continue in the near term. The route of the extension of the northern line through south-west London, expected to be completed by 2020, is experiencing a similar boost. A natural follow-on effect is that outer London commuter areas are forecast to rise by 25% in the next three years7 as buyers are priced out of central districts and reassured by the promise of better connectivity and 24-hour tube trains.
New legislation unlocking development potential is also creating fertile ground for investors. In 2013, a temporary right was introduced to convert offices to residential use without the need for planning permission (with some notable exceptions including the central, “City of London” region). The government has now announced this right will be made permanent from May 2016 (with time-limited exceptions), as part of the new Housing and Planning Bill, in support of its pledge to deliver 1,000,000 new homes by 2020. The right will go further than the current temporary right, in allowing not just conversion but demolition of existing office buildings for new residential units, and draws in additional use classes such as light industrial buildings. This is just one of many planning law relaxations announced since the Conservative Party’s surprise majority win in the May election. Many more are expected given its ambitious growth targets.
Outside London and the south-east, there have been indications of localised recovery in certain central and northern regions since around 2013, firstly in Manchester and Birmingham, and latterly in areas of the North-East. However a funding bias towards London and persistent constraints on development such as inadequate northern transport links, not just to London but also from east to west8, have held growth back.
Perhaps belatedly the government recently decided that having an economy so reliant on its capital city may not be for the best. We have known for some time that it's not normal – no G20 country is so dominated economically by one city.9 The response was the much-publicised proposal to boost economic growth in the North of England by investment in its key cities to create a so-called “Northern Powerhouse.” The proposed legislation is far reaching - covering transport, planning, housing, skills, and specific deals for certain regions in order to attempt to create the conditions needed for local economies to thrive. Over the next five years alone, the government has promised to spend £13 billion on northern transport alone. The proposals are too numerous to list but include upgraded rail connections linking London to Birmingham (in the midlands), and Birmingham to Manchester (in the north west) and Leeds and Sheffield (to the east) (“HS2”), as well as a northern network taking in Liverpool, Manchester, Leeds, Sheffield Newcastle and Hull (“HS3”) and a £1 investment in Manchester airport.
Headlines about growth and investment in areas of the north of England have started to come to the world’s attention. According to the influential think-tank IPPR North, the north of England could be about to experience a period of growth “not seen since the Victorian era…”10 In September our chancellor showcased £4 billion of investment opportunities in the north of England to China, swiftly followed by the prime minister on a similar promotion drive in New York. Significant pledges are already secured.11 Naturally if the promised investments materialize they will impact the real estate market, creating jobs, increasing visitor numbers and regenerating these areas.
The newly-announced Cities and Local Government Devolution Bill also plans to hand control over local transport, planning, housing and other key areas to local regions. Manchester, now the UK’s fastest-growing city12, was first to initiate the devolution process, followed by Sheffield, with other cities following behind. One key tenet of the devolution plans will be to allow local authorities a right to set their own business rates (being the taxes non-domestic occupiers pay on their properties) to boost economic activities in their areas and attract businesses back into city centres.
The picture in the north is not uniform. The steel industry has long been in decline and some areas are conspicuously absent from the government’s investment plans. Even in those core cities we know to have been be graced with favour (Manchester, Leeds, Liverpool, Sheffield and Newcastle), the lack of funding specifics will make it difficult to identify hot-spots for immediate investment. But those who can do so may be the big winners in coming years.
Wherever you do choose to invest, Dechert’s London-based team have an experienced group of property, planning, tax and finance lawyers ready to help, with knowledge of the most efficient holding structures to deploy and the particular issues faced by international investors.
1) William Penn Adair (1830-1880).
2) See IP Global.
3) Annual survey by Association of Foreign Investors in Real Estate (AFIRE) put London top in 2014 and New York top in 2015.
4) See British Land Analysis.
5) George Herman “Babe” Ruth (1895-1948).
6) Europe’s largest current infrastructure project, Crossrail, is an underground railway being constructed from west to east, across Greater London. The firsts services are expected to run in late 2018.
7) Savills’ 2014 five-year growth forecast.
8) It is quicker, for example, to travel the 283 miles from London to Paris by train than it is to travel less than half that distance between Liverpool and Hull.
9) London Property Analyst, 2015.
10) See IPPR North.
11) End of September government announced deal for funding from China to build 10,000 new homes in Manchester, Leeds and Sheffield.
12) Source: JLL. Values have risen 20% in a year and some forecasters put price growth in Manchester at 26% to 2019.