The real estate development process

The real estate development process.

Choice of locationShops Factors influencing the location of shopping facilities include particularly: purchasing power of consumers; amount of floor space already available; competition from other centres; transportation and car parking; shopping habits and preferences. Offices Traditionally offices have tended to be located in central business districts. Reasons for this can be suggested: the interrelationship of businesses requires ready access to other offices, and dispersion is uneconomic; convenience of access to public and the staff at the point where most public transport systems terminate; access to government and local government and various services historically present in central areas; • attractions for staff in terms of shops and other town centre amenities. 2.3 Warehousing/distribution centres Determinants of warehouse location may be adduced as: proximity to markets; access to major roads, preferably motorway intersections, enabling access to international transport networks. 2.4 Industry The real estate development process Paper 10218 Page 8 The factors determining industrial location have probably been subjected to more rigorous research than any other, prompted by the widespread desire of government and local authorities to attract industry to certain locations where older industry is in decline or rationalising, and unemployment results. The following factors emerge, generally in order of priority, in determining the location of new or relocated industries. Labour — Labour is the primary consideration. The labour force must, moreover, be suited to the industry, and workers made redundant by older industries will not necessarily be the most suitable employees. Female labour is required in some sectors. Trainable labour is generally more important than trained people, though some industries will go to an area where they can draw on an existing pool of trained labour and where training and back-up facilities are already established. This leads to concentration of, for example, engineering and electronics in certain areas. The needs of management staff may be important and the existence of suitable housing, schools, services and environment can strongly influence locational decision. Lower labour costs have prompted companies in both the manufacturing and service sectors to move some of their operations to other countries, where feasible to do so. Transportation — The desire to minimise transport costs and inconvenience has been a strong factor in the past. Heavy industries are concentrated near to sources of power and supplies, ports and railways for this reason. Modern light industry, on the other hand, tends to favour access to markets and motorways, as can readily be seen. Airports are very significant for some modern industry, and this is reflected in rents around the London Heathrow Airport area where rental values are among the highest in the country, showing a strong demand for both warehousing and industry in this area, and more recently buildings providing high-specification business space. Access to markets — The major conurbations offer a large potential market along with a pool of labour, and are thus favoured over more remote areas for new industry. Access to suppliers is less important than access to markets. Government incentives — In the main these can include grants, tax breaks, advance factories, and advisory services. These means are used to attract industry to specified locations and, so far as advice and publicity are concerned, they have become increasingly sophisticated, with different areas competing to attract industry. Public sector activity includes provision of infrastructure, such as transport networks and utilities (commonly with a financial contribution from developers), which are very important to industrial users. Various designated zones, within which normal planning and fiscal controls are relaxed, have been features of UK government policy since the 1970s. All incentives provided by the public sector are sensitive to changing policy with regard to public expenditure. The environment — For transferred key workers and executives, the environment and services are of considerable importance, as noted under ‘Labour’. Government action at local, national and European levels may be designed to improve the environment in certain areas with grants for land reclamation and clearance of industrial dereliction, and designated improvement areas. These environmental measures assist the conservation and development of existing business and halt population decline, and it is this rather than the contribution to attracting industry which is probably more important. Multi-use business space What was commonly called ‘high-tech’ when it emerged in the 1980s as a new classification of building, fits neither the office nor manufacturing category. Rather, the accommodation may be required for office, research and the production and storage of products which require a high level of expertise in their development and production, and space allocated to each use may change from time to time. Buildings are typically low density, one or two storey, and closer in specification to offices than conventional factory or warehouse buildings. Not all companies require a very high standard of building, but many do want good quality internal and external environments, particularly the American-based companies. Among those factors which influence location are: Transport — For example, Digital’s UK headquarters on the outskirts of Reading, is close to the M4 and well within an hour’s drive of Heathrow airport. The site is some distance from the town centre and shopping, which could be a disadvantage from a staff point of view, but land availability, car parking and transport were overriding considerations. Cost of accommodation — This is affected by the flexibility of the accommodation: Flexibility of use within the structure. The ability of the various functions to mix and match, e.g. research and development with production. Flexibility in reorganising space is essential. Flexibility for growth. There is a need to build in flexibility to grow in situ and also for firms to move to alternative premises without constraints. External environment — High-tech industries require highly qualified workers who have to be attracted. Suitable housing and environment are therefore significant. Proximity to other industries in the same sector, and in some cases to a university or related research institution. 2.5 Residential

Land for development3.1 Greenfield sites As part of planning policy, the statutory development plans will seek to identify areas of land considered suitable for development and indicate the type of development which the planning authority would like to see taking place. There is, therefore, an interplay of market demand and statutory planning in locating and securing development land. The UK government’s National Planning Policy Framework (NPPF) for England (DCLG 2012) requires local planning authorities to identify and update annually within their development plan five years’ supply of developable sites for housing schemes, plus a minimum ‘buffer’ of 5% to allow for ‘choice and competition within the market for land’ (para. 47). What is Maidenhead and Slough's development plan? In some countries it is established government policy that priority should be given to reusing previously developed brownfield sites in preference to greenfield sites (see below). By developing brownfield sites, urban regeneration is encouraged and encroachment into countryside is safeguarded (DCLG 2012: 19). 3.2 Redevelopment Regeneration initiatives have been implemented in many UK urban areas in the 1990s and 2000s, and sometimes have required the use of compulsory purchase orders (CPOs) to assemble land for redevelopment. 3.3 Brownfield sites Government policy in the UK and elsewhere has been to prioritise the reuse of such sites over the development of greenfield sites through the application of strict planning controls in the interests of a more sustainable form of development. However, there may be circumstances where it may be difficulty to give priority to a brownfield site — e.g. because it constitutes an important wildlife habitat or is prone to flooding — without special measures being put in place. One of the problems associated with brownfield sites is that commonly there is little direct information about former uses at the site. Industrial processes may have resulted in contamination of the land by a multitude of processes, but this is most unlikely to be concluded merely by a visual inspection. 3.4 Infill sites Separate from brownfield sites is the possibility that land between existing buildings may be suitable for development. Referred to as ‘infilling’ domestic garden land (pejoratively referred to as ‘garden grabbing’), this could be on other open land, former parking or landscaped areas. Most frequently such sites will be in suburban areas, but they can also be in towns and villages. Problems can arise from land acquisition where garden land may be in several ownerships and one or more owners are unwilling to sell. Obtaining planning consent can also be a problem because of the perceived increase in density and effects on amenity. One way round this might be to demolish an existing building to create more space and allow appropriate access, but care needs to be taken because of the need to cover costs of acquisition, demolition and development. The increase in density required to achieve a return might lead to suggestions of ‘town cramming’ by the local planning authority and residents. It means that development at such sites needs to be treated with caution. The coalition government clamped down on ‘garden grabbing’ shortly after the 2010 general election by removing it from the classification of brownfield land (DCLG and The Rt Hon. Greg Clark MP 2010) but other infill options still remain. 3.5 Encumbrances While a developer may be in a position to acquire an interest in land, either freehold or long leasehold or an option to buy or lease, the peculiar nature of land and land tenure requires a rather more detailed investigation than broad considerations of size, shape and terrain. The more obvious features of the site, such as shape, may serve for initial consideration of development potential but a more detailed appraisal will require investigations of both physical and legal encumbrances or attributes. Physical features Attention is drawn to the following: size and shape — whether suited to the proposed scheme of development, or what constraints are imposed by physical boundaries; terrain — its effect on design, layout and economics; load-bearing qualities of subsoil — the need for piled foundations or stabilisation, or raft in place of strip foundation or pads; existence of subsidence or made ground and unsuitable fill; underground pipes, cables; existing buildings, old foundations, retaining walls supporting or protecting the site; historic remains which are protected by legislation; contamination from previous use on or near the site. Legal encumbrances A variety of legal encumbrances may exist, as follows: Restrictive covenants. Restrictions on the use of the land can be imposed by a conveyance of the land by some previous owner and ‘running with the land’, and therefore binding on a purchaser. Where such restrictions apply but are outmoded, land law may provide for the discharge of the covenant. This could be subject to payment to the beneficiary (e.g. an adjoining owner of the ‘dominant tenement’ or land for whose benefit the restriction was imposed) equal to the loss which he sustains; i.e. not the value to the person receiving relief from the burden of the covenant. Restrictions on leasehold land are generally more numerous and more common since one of the reasons for granting leases rather than selling is that the freeholder can retain control over the use and development of land for the benefit of his estate generally, or to secure community benefits. Such covenants are normally a matter of obligation between freeholder and leaseholder. Among the more common are: use, e.g. restrictions or prohibition of business uses in residential areas; premises not to be used otherwise than for offices, or particular trades; alterations, not to be made without consent; plans of all new buildings to be approved by the landlord; assignment and subletting, not to be permitted except by consent of the landlord. Reservations. A grant of a leasehold tenure may reserve rights to another owner, such as right of way, right of light, rights of running cables or pipes. These will impose restrictions on the size or design of the building, which must be so placed and arranged as not to interfere with rights. Again, negotiations of variations with the dominant owner are possible, and substantial sums might be negotiated for relaxing such reservations. In some cases, such as gas mains, the prejudicial effect of pipes on development results in compensation to the current owner additional to original consideration for the easement. 3. Public rights of way. These can exist across land and legal procedures may become necessary (and be available) for varying or closing public routes. The existence of public rights of way is clearly material to development. Existing tenancies. In many cases, the existence of tenancies will be obvious from occupation, but this is not always the case, and proper enquiry is necessary. Care may also be needed over service of notice to quit on business tenants. There could be a lengthy time period involved depending on the way in which national laws are worded. Licences, way leave agreements, leases of easements. Rights over land, such as for cables and pipes, may be granted under a form of licence or lease. The terms of such agreements should provide for the removal or rerouting of cables etc. if required by the owner. It will generally be the duty of the vendor or lessor to disclose the existence of rights, and to indicate whether or not the land is conveyed subject to them. Boundaries. As with any transfer, the delineation of boundaries and responsibility for fences, walls, especially any retaining wall, embankments and water courses, needs to be clear early on to prevent later disputes over what is conveyed and what liabilities pass with the land.

Refurbishment 4.1 Advantages of rehabilitation The following list of advantages of retention and rehabilitation of old buildings compared with demolition and site rebuild is by no means definitive but covers most of the general benefits involved: The real estate development process Paper 10218 Page 14 Shorter timescale before the new accommodation is available. The work involved in rehabilitation is normally much less than that with demolition, site clearance and construction of new buildings, provided major structural and infrastructural changes are not necessary. There are time savings, too, at the pre-contract design and planning stages. Financial benefits − These benefits have been categorised by one observer as: the shorter contract duration, which reduces the effects of inflation on building costs; the shorter development period, which reduces the cost of providing finance for the scheme; the client obtains the building sooner, and therefore begins to earn revenue from it (for example, rentals or manufacturing profits) at an earlier date. Existing construction and its state of repair have a significant influence on the costs of conversion. Ceiling heights, for instance, may be too low for modern purposes and substantial alterations may be required. Flooring, which may be of timber construction, could also necessitate upgrading to comply with fire regulations. An important prerequisite, therefore, to any decision made as to whether to rehabilitate or rebuild is the preparation of a detailed cost feasibility analysis. It should be noted that, within the UK, new-build residential construction is zero-rated for VAT purposes, while repair, maintenance and conversion is subject to VAT. These considerations will need to be incorporated into the feasibility study if the scheme relates to residential use. A useful summary of the liability of different forms of construction work to VAT is available at: www.parliament.uk/briefing-papers/SN00587.pdf [accessed 30 October 2012]. Environmental benefits − Most schemes of rehabilitation are justified on the grounds of the architectural or historic qualities of the building under construction. In many respects they represent an irreplaceable stock in terms of design and character. 4.2 Costs of refurbishment The costs of refurbishing and recycling an old building will be determined on several counts. Gorse and Highfield (2009) list some of these as follows: • The standard envisaged − The proposed quality of the accommodation to be provided is an important cost criterion. The choice of the quality and appearance of the finished product affecting, as it may, fenestration, plasterwork, paintwork, lighting, heating, restoration and insulation is a significant cost factor. So, too, is the quality of the services and utilities envisaged. Existing ones may be inadequate for contemporary usage. Lifts may be needed as well as improvements to stairwells. ‘Virtually every design decision relating to the quality, standard or amenity of the refurbished building will have a direct effect on the final cost of the scheme — the higher the specification, the higher the overall cost of the building. However, as stated above, in the long term, the greater costs incurred by providing a higher standard of refurbishment can be The real estate development process Paper 10218 Page 15 recouped by the higher rental income (or resale value) that such standards can demand.’ (Gorse and Highfield 2009: 11) The proposed new site − The use envisaged for the premises is another major determinant of costs of conversion and renovation. For instance, costs of conversion of extreme uses, e.g. a church as part of a speciality shopping centre scheme, may be high, whereas conversion within a similar use range, such as a warehouse to light industrial units, may be relatively low. Construction − As has already been noted, the materials used in the construction of any building have an important bearing on conversion costs. The major influence in this regard is that of fire regulations, and the need to upgrade premises for improved access for disabled persons following the Disability Discrimination Act (DDA) 1995 and its subsequent amendments. Age − Age and length of periods of disuse influence costs of repairing and restoring, with dampness a major factor to be taken into consideration. With a building which has been empty for a long time, vandalism may well prove to have a cost implication. Neglect or obsolescence of internal lighting, heating and sanitary fixtures will also affect conversion costs. ‘In many refurbishment schemes it will be found that the overall costs are directly proportional to the age of the building and the degree of neglect it has suffered, and the proposed refurbishment of any old, neglected building should therefore be given very careful consideration before proceeding. For this reason, it is vital that the first stage of any feasibility study should comprise a detailed survey of the building in order to establish the precise extent and costs of any works required to repair and restore the structure and fabric to a reasonable standard.’ (Gorse and Highfield 2009: 11) In summary, it should be emphasised that any rehabilitation proposal needs careful cost examination in advance before any decisions are made on possible courses of action. Such examination should be made on the basis of a detailed survey of the premises in question in order to identify the structural and physical condition of the building, its facilities and services. Two or three options may be developed on the basis of such a survey and analysis and their financial viability further explored. At this stage only crude estimates of costs may be required and comparisons of options can be made accordingly. Estimates should be made by a quantity surveyor with experience of the type of scheme under consideration. Different levels of specification can be examined in this way. Caution needs to be taken, however, in using this method of comparative purpose with regard to the identification and timescale of alternative schemes being utilised. 4.3 Industrial premises There are two main types of industrial refurbishment: speculative refurbishment of buildings for industrial use to be let or sold to some as yet unknown industrial user; and refurbishment for known users, whether they already occupy the site or not. The difference between these two lies largely in the client’s financial view of the project and how well the refurbished building suits a wide range of uses. Refurbished premises have to respond to industrialists’ requirements in respect both of location and of facilities offered. There has been a shift in demand, for instance, from The real estate development process Paper 10218 Page 16 multi-storey to single-storey premises, with an associated trend towards lower density and more spacious layout. The reasons for lower site coverage can include: the need to be able to bring large articulated heavy goods vehicles off the road and on to the site for loading and unloading (requiring large areas for manoeuvring); the demand for space for on-site car parking; the need for external storage and the preference of many industrialists for some opportunity to expand on site. Increasingly, environmental factors are also playing a role in the demand for less intensive site use as occupants and landlords become aware of the quality of the development as a whole, and want space for landscaping and planting. Private sector speculative refurbishment of industrial buildings relies generally on self-financing developers. Developers who require institutional financial support are likely to be constrained in the number and quality of refurbishment schemes they can undertake because of the tight design and policy constraints of the institutions’ lending criteria. In many instances, public sector financial assistance is available and this is discussed more fully later in this paper. The financial feasibility equation as to whether it is better to refurbish an industrial building or redevelop the site with a new building is primarily influenced by the feasibility study. However, developers may also take other factors into account. The considerations which concern different categories of developer are shown in Table 1.1. The rent that can be asked for a refurbished industrial build will depend on how closely the premises conform to institutional investors’ standards. Their main criteria for good industrial property are as follows: prime location — this should be good in terms of access and level of economic activity; good environment — this should enhance rather than detract from the value; secure income — ‘blue-chip’ tenants are preferred; rental growth — the level of economic activity of the tenants is likely to increase significantly, which is often more important than the initial rent level; freehold or long lease — this should be for at least 125 years so that there can be at least one rebuild on the site in the life of the lease, that is, a building life of 60 years; construction — eaves height should be 5—6m, and internal brick walls should be built to 3—3.5m in conventional construction; minimal management problems — the property should be easy to administer, for instance with clearly defined tenancies;

Assessing demand

Parties involved in development

The stages in the development process

General notes on development

Egon's Reports (1998 and 2002)