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Sat 29 Aug 2015 12:54 AM

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Is Gulf developers' love of London set to cost them a lot more?

Controversial changes to property planning legislation in the UK were recently overturned by the High Court in a ruling that could see Gulf developers billed millions more in fees. We speak to experts about the potential impact on the Arab obsession with luxury London property

Is Gulf developers' love of London set to cost them a lot more?

Each summer the British media finds a new way to report on the luxury supercars parading around London. From purple Lamborghinis to gold Rolls-Royces and superfast Ferraris, the novelty value never wears off. Equally, some of the poshest parts

of the British capital are increasingly being called home for the Middle East’s richest families.

In May, the Qatari royal family bought one of the city’s grandest homes for over £40m ($61.9m) in an area

of Mayfair that has become so popular with Qataris it has been dubbed “Little Doha” by some excited real estate brokers.

The big-spending Al Thani royal family is also attempting to build a $300m mega-palace for themselves in London’s Regents Park by knocking together three listed homes, but is facing council objections to its plans.

However, the Abu Dhabi royal family, the Al Nahyans, is now reportedly the largest landowner in Mayfair behind the Duke of Westminster, who inherited huge swathes of property in Central London. Its portfolio includes the lavish £400m ($627.7m) Berkeley Square Estate, purchased nearly 15 years ago.

It’s not just royalty either. Gulf developers are channelling $15bn a year into overseas real estate assets, with London remaining the top draw, according to real estate consultants at CBRE.

However, “Little Doha” is not the only location where council objections have been fought over Arab plans to redevelop the city. Some elements of the British media and political classes are not overly keen on the Arab invasion of some of the UK capital’s most sought-after property markets and a recent legal battle in the High Court could lead to Gulf-based developers being handed a bill for millions of dollars in fees.

The crux of the argument is the UK’s National Planning Practice Guidance, which states that when a luxury developer decides to redevelop a plot of land it must also make contributions to local government councils in order to fund the building of affordable housing schemes.

In November last year, Conservative Party government housing minister Brandon Lewis unveiled a “Vacant Building Credit” scheme, which amended the current regulations and introduced a minimum threshold for councils to seek affordable housing.

Lewis claimed that the current contribution levels amounted to a “Stealth Tax” and was putting large developers off redevelopment land banks in some of the city’s most lucrative areas. He hoped it would be a catalyst for development and investment and make it easier to convert empty or unused buildings back into housing schemes or viable homes.

The move by Lewis and his government meant developers would potentially save millions, if not billions, leading to massive objections from many stakeholders. For example, Westminster council complained that the new policy would mean the Abu Dhabi Investment Council, along with partner developer Finchatton, would see its affordable housing contribution fee to redevelop the former US Navy HQ in Mayfair decrease from £17.6m ($27.6m) to around £8.6m ($13.5m).

The heated debate over the impact of the scheme prompted a legal challenge by West Berkshire District council and Reading borough council, which feared they would lose much-needed revenue to plough into their affordable housing schemes. The court made its ruling in July and millions are now at stake for Gulf-based developers, their projects and how much they will be liable to pay going forward.

In his ruling against the Housing Minister, Justice David Holgate stated that the minister’s “consultation process that preceded the policy change was unfair”, and the decision to introduce the new national exemptions from affordable housing requirements “was irrational”.

In response to a query on the impact the removal of this loophole would have on luxury London developers, a Department for Communities and Local Government spokesman issued the following statement to Arabian Business: “We’ve got Britain building and we’re determined to maintain this momentum, including by reducing the red tape and extra costs that prevent smaller developments from getting built. We are disappointed by the outcome of the judgement and will be seeking permission to appeal against the judge’s decision. This will have a disproportionate impact on smaller builders who are important in providing homes for local communities”.

Jonathan Manns, director of planning at property consultant Colliers in London, says the main issue here is “the government’s reforms lacked support from the industry and, ultimately, were shown in court to be legally unsound”.

He believes investors in London need clarity and quickly. “Developers ultimately seek certainty, which reduces risk and can improve speed of delivery, each with financial savings. Whilst this particular window for cash savings has closed, reverting to the previous policy position should still provide some comfort."

However, Manns is upbeat and is of the opinion that “this decision is unlikely to deter overseas investors. Affordable housing contributions are only one element of any development appraisal and London’s market remains very robust. Housing needs and demand are increasing exponentially”.

His confidence is now shared by all observers. Daniel Farrand, head of planning at law firm Mishcon de Reya, says the issue was how it was handled by the central Westminster government and the impact it will have on confidence in the overall red tape associated with investing and developing in London.

“The government didn’t see the national policy for exemptions as a loophole but as active encouragement for redevelopment of brownfield land and small sites. That policy was been quashed by the court because of numerous flaws in the way it was brought in and the evidence used to justify it. The government has said it will appeal but may also be considering whether there are other ways of meeting their desire to free up smaller sites from regulation,” Farrand observes.

“Councils were already very resistant to allowing claims of exemption from affordable housing contribution but whether or not the government appeals this decision, it is certain that councils will now insist on the full amount of contribution. This will certainly increase the cost of some developments and eliminate the hope of cost savings for others.

“The planning system has always been one of the hurdles for a Gulf investor in the UK. The costs of residential development has potentially gone up but there still remains the opportunity to negotiate if the required contributions make a development unviable. At worst, the position has just returned to where it was in October 2014 before the policy was announced,” he adds.

One of the stakeholders unlikely to have welcomed the recent legal move by the High Court is the British Property Federation (BPF), which is keen to play down the impact the judgement will have in attracting developers to London and further afield.

“Just to clarify, the ruling by West Berkshire District will only really affect the regulation surrounding section 106 for schemes of ten units or fewer. Guidance on how to apply vacant building credit was produced by government in April, so not much has changed on that front,” a spokesperson said when contacted by Arabian Business.

“The policy has been removed from the planning policy guidance. The Department of Communities and Local Government intends to seek permission to appeal the decision, so the future of the policy is currently uncertain. We are not yet sure what will happen to those schemes which have received planning permission before this ruling, and are currently seeking clarity from government. As the ruling only applies to schemes of ten units or fewer, there is a limit on how much it will cost investors if it reverts back to the original system,” the spokesperson added.

With the ruling focused on smaller developments, the BPF is eager to believe that this will have limited impact on Gulf investors. “Since this ruling only applies to schemes of ten units or fewer, it should not deter Gulf investors from investing in larger regeneration schemes either in London or the rest of the UK.”

Melanie Leech, chief executive of the BPF, adds: “There are two sides to this policy. On the one hand, it will have had the welcome impact of helping small developers get schemes off the ground. On the other, it may have contributed to a shortfall in affordable homes. Given that affordable housing needs differ considerably across the country, we recommend that the setting of affordable housing thresholds should be set at a local level, rather than by central government, to allow local circumstances to be considered in relation to viability.

“We are concerned about what this decision means for developments of ten units or fewer that are currently going through the planning process, and would urge clarity from government as soon as possible so as not to stall development,” she adds.

In this regard, JR Capital, a London-based firm that manages money from the Middle East for residential investors, says, unsurprisingly, it is not convinced the removal of the credit would deter developers from investing in the capital and it has not seen any drastic change in the investment habits of developers from the region.

“We do not think this will have much of an impact on residential development in Central London and it will not deter Gulf investors from investing into residential development opportunities. We haven’t seen a rush to buy sites or to submit applications on existing owned sites since the policy change from government last year and I don’t believe it’s being regularly enforced by local councils,” says Michael Ferris, part of the management team at JR Capital.

“The fact is, there are very few large scale development sites left in Central London and where there are, the premium is usually such that we do not think this recent ruling will deter developers in the future… It may have an impact on development in the outer London zones and areas outside of London where there are more vacant buildings and brownfield sites and where the premium for residential use is often less.

Gulf investors prefer to stick to Central London, which they are more familiar with and consider a safe haven.

“The outlook for UK property remains positive over the medium term. Whilst residential values in prime Central London have slowed over the past 18 months, Zones 2 to 6 continue to outperform due to a lack of supply,” he adds.

The consensus seems to be that it is unlikely rich Arabs will stop investing in large developments and snapping up trophy assets in London, but going forward it is clear that it will now cost them millions more in fees and allocations to local councils. The Gulf developer currently likely to be impacted by this latest move declined to respond when contacted by Arabian Business. With the Westminster government in the process of lodging an appeal, there is still plenty to play for.

But with a London mayoral election on the horizon, Gulf developers should not underestimate the power of the opposition in the city. Tessa Jowell, a former Labour cabinet minister and London mayor frontrunner, said the loophole had “done untold damage to London and has now rightly been quashed by the courts. This Tory scheme delivered developers a loophole to avoid providing any affordable housing — just when our city needs it most”.

Pressure group Generation Rent added that the loophole was “completely unjustifiable”, while the Labour Built Environment group told The Standard newspaper the decision in favour of the local councils was “a victory for common sense”. The war of words is anything but over.

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Boris J 4 years ago

Hats off to the British Government. The UK is what it is because there are planning rules and regulations that have to be abided by so that all streams of the UK Population are covered. It is only very recently that the UAE has woken up to the need for affordable housing as many people can not afford the high end properties that many developers continue to launch. It will be interesting to see how Gulf Developers perform in the UK as they are effectively not playing in their own back yard and have to pay for the land that they are to develop. Also with far higher labour and material costs plus far stricter environmental codes, it will be a different ball game to developing a patch of sand in the Desert. They can forget working on schemes in residential areas 24/7 as councils actually enforce working restrictions.
I hope for all concerned that they do succeed and perhaps they will then have better understanding of how schemes evolve in 'The Real World'