11 June 2007
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The continuing real estate development boom in the regions around London has brought about a greater demand on law firms to provide niche real estate financing advice. East Anglia in particular is a development hot spot which contributes not only to the local economy, but also to the strong demand for housing in the region.
Developers are seeking to secure early funding and there is a greater appetite from the region's funders to provide it, resulting in an increase in the number of major development projects in East Anglia. Such projects require specialist advice in respect of real estate, banking, construction and planning issues. Firms ideally placed to keep abreast of the boom have sought to integrate their real estate expertise fully within their banking capability to provide a 'one-stop shop' to advise on such schemes in the most cost-effective and efficient way.
The development schemes themselves are becoming increasingly complex in terms of the use of tax-efficient structures, often involving offshore and corporate elements. As a result, developers and funders alike are moving away from the practice of involving either a general practitioner or, on large-scale transactions, many different lawyers within a firm (or sometimes from several different firms).
In the current market, a more integrated approach in which specialists deal with all issues relevant to real estate financing is a strong selling point. This approach has also been adopted by many of the region's main banking players, which have reorganised themselves into specialist sectors. It is becoming increasingly common for banks to have a corporate finance team and a separate and specialist real estate finance team rather than the previous approach of individual teams dealing with customers within specified turnover bands or by industry sector.
East Anglia is seeing ambitious regeneration plans, many of which are supported by the East of England Development Agency (EEDA) working in conjunction with local county and district councils. Port development projects at Great Yarmouth and Harwich are in progress with strong public support for the creation of new workspace, housing and improvements to transport. Given the complexity of such projects, the EEDA and other local authorities have sought specialist legal advice on the funding arrangements and the general real estate and construction agreements to ensure that the public funds are protected. Their legal advisers need to be up-to-date on the issues surrounding state aid rules, as well as the powers and obligations of such public bodies.
A 2006 residential review prepared by Knight Frank projected that Cambridge will experience a population increase of 33 per cent between 2001 and 2021, or 36,400 additional residents. Transport links in and around the city need to be improved. Plans are being considered for a guided busway linking Huntingdon with South Cambridge, as well as for the widening of the heavily congested A14. As a result of these plans, affected parties have sought early legal advice on the implications of the proposals.
Local developer Ashwell Group is working with Cambridge councils on a revised planning application for a scheme comprising a major redevelopment of the area surrounding Cambridge Railway Station. The scheme will provide around 1,400 new homes (30 per cent of which are anticipated to be affordable), new shops, offices and restaurants. The project has involved local firms providing specialist real estate finance, planning and construction-related advice. Transactions of this size and scale would in the past have been dealt with by City law firms, but regional firms are now able to show they have the relevant skills and resources to deal with such development schemes.
Another development hot spot is Chelmsford, which is the subject of a billion-pound plan to transform the town centre. The council unveiled plans of the scheme in January, which include a major department store, theatre, sports facilities and new homes. Chelmsford is also the planned location for the first new racecourse to be constructed in the UK for more than 80 years. The legal advice required on the funding of the Great Leighs Racecourse development involved many specialist areas, including real estate, banking, corporate and IP.
In response to the increased levels of development surrounding Chelmsford, several banks have opened regional offices to accommodate the increased demand for funding.
Another issue invoking much local debate among developers is the Planning-gain Supplement (PGS). The Barker review was set up to look into the lack of affordable housing. The report, published in 2004, recommended the introduction of a PGS tied to the grant of planning permission so that the landowner development gains could contribute to wider benefits for the community. This was followed closely by a consultation paper detailing how the tax will be payable by the developer that implements the permission, although this is not likely to be introduced before 2009.
Unless the Planning White Paper (due May 2007) tells us anything to the contrary, until the final legislation comes into force key legal issues cannot be fully identified, but there has been widespread opposition to the proposal among developers and planners. In light of the region comprising almost a third of the Government's future growth area for housing needs (including the proposed new 'eco-town' at Northstowe, the former Oakington Barracks site), this is likely to continue to be an area of much debate and one where specialist planning advice will be paramount.
Over the past 18 months, the Government has promoted investment in real estate. The long-awaited introduction of real estate investment trusts (Reits) finally came about with the Finance Act 2006. A Reit will not pay corporation tax on its income or gains from its qualifying property rental business so the distributions are taxed only in the hands of the shareholders. At present, a Reit must reside in the UK and be listed on a recognised stock exchange (which excludes AIM).
The current restrictions have seen the larger listed property investment companies converting to Reit status, although other companies in the hotel and pub sectors are now considering converting. From a funding perspective, although Reits are not subject to any specific financial limitations in respect of borrowing, if the income profit of the Reit's tax-exempt business does not cover its related finance cost at least 1.25 times, there will be a tax charge. Well advised real estate investors and funders need to keep abreast of the issues surrounding the Reit as the statutory restrictions may be relaxed in the future and some changes have already been made in the draft Finance Bill 2007.
Law firms need to keep up-to-date on all the issues to be able to advise fully on the legal implications. Clients will demand a more integrated approach from their legal advisers in order to see the most cost effective and speedy resolution to any development project.
•Laura Holdaway is a partner at Mills & Reeve