Covid-19 Updates

As expected there has already been a lot of reaction to the published paper yesterday. What is clearly a common theme however is that everyone agrees that change is needed – we concur. The system is perhaps ‘clunky’, but is it broken? The changes proposed are ambitious and wide-ranging and clearly have an overarching aim of speeding-up development and principally the delivery of housing. In theory this should be seen as a positive.

Past guidance has advocated that ‘good design is indivisible from good planning’. There are echoes of such aspirations here in that design and ‘beauty’ has to be a key consideration as well as quantum and speed of delivery. The two aims are interlinked and it will be interesting to see how proposals progress in seeking to achieve both.

Our Planners at Newsteer have reviewed these changes in detail and are happy to discuss these with you as there are no doubt significant opportunities for you / your estate once these come into effect.

Should you have any questions, please contact one of the team.

From 1 September 2020 these Regulations will amend the Town and Country Planning (Use Classes) Order 1987, revoking Parts A and D and creating new use classes in relation to England.

These changes greatly increase the flexibility to change the use of premises such as shops and offices between uses that were previously in separate classes.

In essence however, and whilst the residential and industrial (B2/B8) Use Classes remain intact, the Government has sought to pool together what they consider to be ‘Commercial, Business and Service Uses’ (spanning as wide as office provision and health services) ‘Learning and Non-Residential Institutions Uses’ (principally ‘D1’ uses), and; ‘Local Community Uses’ (principally ‘D2’ uses).

The major shift attracting the most attention however surrounds the new ‘E’ Class uses. In simple terms, the traditional boundaries associated with protecting certain uses, including shops, office provision and ‘genuine’ community uses (i.e. health care services) have been removed. 

No longer will ’12 or 24’ months marketing, or assessments of shopping frontages be required where changes of land use are proposed under permitted development rights. 

This is a drastic shift in approach and significantly weakens development plan policies which seek to resist such developments without justification. 

This flexibility will allow dormant buildings and particularly town centres to respond much more quickly to the market and in theory, ‘should’ bring vacant high street premises back into an active use.

It is however important to note that Use Classes prior to 1 September 2020 will remain relevant for certain change of use permitted development rights, until 31 July 2021. Newsteer can help guide you through these changes.

Should you have any questions, please contact one of the team.

This note has been put together by our Planners in relation to the long-awaited Permitted Development Right to allow upward extensions to detached blocks of flats will come into force from the 1 August 2020.

As per the more recent raft of changes to the GPDO, sites must first qualify, and then satisfy a number of conditions through the prior approval process. Unlike the arguably ‘more straight forward’ office to residential conversion process the criteria considers in more depth the amenity of existing and proposed occupiers premises including overlooking, privacy and the loss of light – all of which will need to be qualified and could require the submission of further evidence Understandably, protected views must also be considered.

As anticipated, development must be completed within 3 years and prior to commencement of development (as well as notifying the determining authority in writing as such) and must be supported by a detailed construction management plan.

Should you have any questions, please contact one of the team.

Following the recent Government announcement surrounding the ‘overhaul’ of the planning system, a number of important changes have now been laid before Parliament – including the more recently announced upward extensions to existing detached blocks of purpose built flats, the demolition and rebuild of buildings for residential purposes, as well as significant changes to Use Classes.

Our Planners at Newsteer have reviewed these changes in detail and are happy to discuss these with you as there are no doubt significant opportunities for you / your estate once these come into effect.

Should you have any questions, please contact one of the team.

Hugo Fogden

Market rent is a central part of the 1954 L&T Act. It is based on an analysis of the market through comparable evidence.

The RICS guidance note “Comparable evidence in real estate valuation” (1st edition, October 2019) states: –

“Comparable evidence is at the heart of virtually all real estate valuations. The process of identifying, analysing and applying comparable evidence to the real estate to be valued is, therefore, fundamental to producing a sound valuation that can stand scrutiny from the client, the market and, where necessary, the courts.”

Paragraph 4.1 of the guidance note qualifies the type of comparable evidence that is likely to be helpful: –

“Information derived from comparable market transactions will normally provide the best evidence of value. Such evidence should be recent, relevant, and comprehensive. … Transactions in the open market close to the date of valuation will almost invariably provide the best and most reliable source of evidence.”

With the growth of turnover rents, it could be envisaged that turnover rent deals form the comparable evidence.

This raises two questions: –

1. Can the Court order a turnover rent under the 1954 Act? – a lawyer contact of mine said: –

“I think the jurisdiction is there. If the market is trading on turnover rents, it makes no sense that the court cannot order a turnover rent – if it were unable to do so, it would run contrary to the principle of reality.”

Also: –

“The court can only order the ‘market’ rent, as informed by expert evidence. It does not have a general discretion to order something which seems ‘fair’ “.

Let us assume they can. This then leads to the second question. 2. What is a turnover market rent?

Retailer margins and returns can differ significantly. This is not explained (although it can be a factor) by the efficiency of different retailers, but by their different business models and the products they sell. A successful retail environment requires diversity of retailer, which implies diversity of business models. This may result in different turnover agreements and rents. Whereas the traditional comparable approach is all about uniformity, turnover is about diversity.

This raises issues for the valuer.

There should be some consistency in rents within retail sub sectors e.g. fast fashion or convenience food. So, we could end up with different market rents for types of retailer.

But as turnover rents are uncommon at the moment (save in some shopping centres), until it becomes market practice, it may be difficult to persuade the court that this is the norm in the case of, for instance, offices or high street shops.

Moreover the difficulty will be establishing the percentage – how it should be calculated. If the market doesn’t have many turnover rents, the tenant could come unstuck. This will become easier post Covid as the market develops, enabling turnover rents to be argued in lease renewals.

To quote Benjamin Disraeli ‘…Change is constant. Change is inevitable’……For landlords, tenants, valuers and Courts this truism will apply as much post Covid as it did in the context of the 1867 Enfranchisement Reform Bill.

For further information contact

Hugo Fogden

T: 020 3151 4850
M: 07818 427368
E: hugo.fogden@newsteer.co.uk 
W: www.newsteer.co.uk 
20 Farringdon Street, London, 

Brian Sloggett

Covid-19 and real estate investment: it will speed up change, with environment and community coming to the fore.

The question that many are asking is whether Covid-19 will trigger fundamental and permanent change, or will it be temporary. 

Superficially it is very different from previous events that have led to permanent structural change be it container shipping, bar codes, financial de-regulation or the internet, because it is primarily behavioural in that it has stopped us doing things – a negative. However, I think it goes beyond this and its lasting impact will be because it has forced us to try new things – a positive. It is like we have been living in a bizarre and tragic social experiment that has forced us to adapt and learn. When we look back Covid -19 will be viewed as an external impact that speeded up change that would have happened. By removing social and economic resistance it forced us to fully adopt technology, change behaviours and make changes that were going to happen.

This is not to ignore the human and business cost of Covid-19 and I am conscious that many good business’s will never recover that has nothing to do with underlying structural change.

These changes include a realisation that many tasks can be carried out away from a communal physical place we call an office. A realization that work and home can work together. A realization that the way we were living was getting too intense. A realization that off peak travel is enjoyable and can fit in with effective working. Through spending more time in our local communities, a realization that they have a lot to offer. A realization that many choices we have are not binary.

One of the main trends of the last 30 years or so has been greater centralisation and concentration whether this be the growth of cities, office clusters or shopping centres. Scale has bought great benefits but costs also. Technology is enabling us to combine the benefits of de-centralisation whilst keeping the benefits of our cities and central areas.

So, what does this mean for real estate investment strategies? I have the following observations:

  • Importance of community: start looking for retail and F&B in centres that combine a strong connection with a well- defined community they serve and provide accessible space that can be easily adapted. The de-centralisation trend will result in greater spending and more dwell time in these centres.
  • Importance of environment: offices in central areas will remain an attractive investment proposition but they should not just replicate what you can do elsewhere. When you come together with your colleagues then there should be an incremental and positive benefit. From a real estate perspective, I think the better performing offices will be those that can deliver an environment that is creative and inspiring both inside and increasingly in the public realm outside over its lifecycle.

Two further observations. Since future adaptation and change will be increasingly important then construction methods need to change to make this much easier. Maybe the biggest change will be an investment strategy that is not just about buying the right asset but having a management strategy that is more focused towards its lifecycle because success will be increasing be about the quality of the environment the built asset provides in itself and its setting. This will increasingly require the involvement of the wider stakeholders including Local Authorities.

So, I started off by saying Covid-19 is primarily behavioural and I think success in real estate will increasingly require a permanent shift in our behaviour moving from a passive approach, to one that needs positive involvement though its lifecycle.

For further information contact

Brian Sloggett

T: 020 3151 4850
M: 0777 376 3840
E: brian.sloggett@newsteer.co.uk 
W: www.newsteer.co.uk 
20 Farringdon Street, London, 

A New, Integrated Approach to Commercial Tenancies 

Registered Providers are not only residential landlords but also often have significant commercial portfolios. As Wednesday’s rent quarter day approaches, indicators suggest that fewer tenants are going make rent payment, meaning that uncertainty in relation to commercial returns look set to continue as lockdown rumbles on.

With three core teams specialising in Planning, Landlord and Tenant Services, and Development Consultancy, Newsteer is uniquely positioned to assist RP’s in considering their commercial assets; and can provide the following:

  • Commercial tenancy advice;

  • Planning guidance in relation to change of use and accelerated applications for change of use;

  • Asset optimisation and options appraisals for sale and development.

Please do contact us should you have any questions.

Brian Sloggett

The economist John Maynard Keynes said: “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” Shopping centre valuers need to ask if they the slave of some defunct method of valuation?

Even before Covid-19 and the full manifestation of the on-line revolution, many have felt a change was needed. Shopping centres are different from many asset classes. Firstly, the property and business are very closely linked. This applies to all retail but in centres it is the inter-relationship of different retailers and the collective impact on the whole value that is different. We need a valuation model that has a closer link of individual retailer to the value of the space they use and also their collective value.

The current approach is very practical but is it defunct? What could be more practical than taking an ERV and multiplying it by an all risks yield all derived from market activity. Practical becomes problematic when we have neither an active market nor reliable evidence.

So, what do valuers do? They start to make larger and larger value judgements based on their expertise and make greater and greater assumptions and exceptions. Those outside our profession look on in surprise and increasing dis-belief.

Time for a new look. What is value? There are many definitions. A common one for economic value is a “measure of the benefit provided”. Value in use or value in exchange are two overlapping but often competing themes. Our current approach is focused on value in exchange which is understandable but maybe we need to move closer to value in use for shopping centres. Value originates from the retailers and ultimately from the customers and community they serve. What we do know is that the value generated by different retailers varies reflecting different business models. We also know that retailers benefit from the collective attraction of others. A valuation approach based on Zone A’s, floor space and size are an attempt to impose uniformity rather than encourage the diversity that is needed. 

The challenge is clear but what is the solution? To borrow from Maynard Keynes, we should look outside for influence. What do others do for pricing in the absence of an established or reliable market? There are several options but for shopping centres value-based pricing resonates. This is a pricing strategy which sets prices primarily, but not exclusively, according to the perceived or estimated value of a product or service to the customer rather than according to the cost of the product or historical prices.

  • Value-based pricing is as much about a change in mindset, as it is about the underlying mechanics of establishing a price and the sales skills needed to achieve the price in the market. The most important first step in value-based pricing is to address the mindset change, so that the entire commercial organization starts to think about selling value instead of just selling a product.
  • It also requires market segmentation. Different value is generated by different customers. The customers are the retailers and it is accepted that a shopping centre needs different retailers and different retailers generate different returns. They fall easily and naturally into segments
  • It requires a business to business approach of both parties understanding what drives value and creating the conditions to deliver this

These are consistent with what shopping centres need to become. Landlord and retailer acting as one. Communal and private space becomes one attraction. The community and centre become one. Value pricing facilitates all the stakeholders acting as one. Valuers need to throw off their chains, learn new skills and challenge themselves. Value pricing may be a start. 

For further information contact

Brian Sloggett

T: 020 3151 4850
M: 0777 376 3840
E: brian.sloggett@newsteer.co.uk 
W: www.newsteer.co.uk 
20 Farringdon Street, London, EC4A 4A

Dom Moore

In recent weeks, there has been a great deal of debate about turnover rents, leading us to believe that they are the panacea to the structural challenges being faced by the retail sector.

At Newsteer, we are working with retailers, landlords, developers and Local Authorities helping to re-shape the retail sector by understanding the dynamics that are driving change. We believe that turnover rents have an important role to play, but we must be careful in our rush in trying to find an instant fix to what is a fundamental structural market problem.

We must not be tempted to replace an out moded model of inflexible and restrictive upward only rent reviews, with something that does not deal with the real market challenges being faced by today’s retailers. We must work together to create a positive understanding between landlord and tenant that changes behaviour and aligns interest, not only of the parties but of wider stakeholders. Building a sustainable relationship based on mutual success must be our collective aim. A healthy retail sector plays a vital role in growing and sustaining our local communities as well as creating jobs and helping to drive our economy. 

We are currently involved in many rent negotiations, and it is a shame that some landlords see this as a short-term fix to protect income – and for some tenants a means of reducing short term costs. 

Both parties miss the longer-term benefits by thinking this way. The landlord has a self-interest in investing in a supportive and commercial environment within which the retailer can bring its brand and entrepreneurship skills. 

For too long, landlords have hidden behind long-term fixed contracts where the return has relatively little to do with the underlying success of the tenant. This has fast become a focus on the contract rather than a focus on the retail story. 

Over the past few years, we have seen some valuers increasing asset values annually, resulting in a greater and greater gap appearing between book value and real value. If the tenant was not trading well then that had nothing to do with the market rent – as there was always demand to take the space. A generation of valuers have grown up with little understanding for retailers and the challenges they face today with their businesses. 

The move to turnover rents changes behaviour and thinking but it needs to respect and reflect the many different retail business models and the returns that are made. Not all retailers are the same and each delivers different cash flows and returns. But let’s not forget that a lower return does not necessarily mean a poorly run business. 

Negotiated fairly, turnover rents can support positive change and provide a healthy sustainable future for all parties. Landlords need to accept that the returns they will get from different retailers will vary and they must invest along with the retailer in enhancing performance. The age of the constant rental uplift is dead, and landlords can no longer sign a lease and just walk away until the lease comes to an end. Today, we have a great opportunity to re-engineer retail, but this will be missed unless we are prepared to change with it.

For further information contact

 

Dom Moore

T: 020 3151 4850
M: 07769650190
E: dom.moore@newsteer.co.uk
W: www.newsteer.co.uk
20 Farringdon Street, London, EC4A 4AB

We have been asked by several clients to provide an update on the current situation concerning business rates relief. 

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