Threats to development in the recovering market

Amid signs that the economic recession might be coming to an end, a period of recovery can not be far away. It is timely to consider new challenges and future threats that the development industry might face in an improving market. A general election, deteriorating Government finances and a public spending squeeze provide the macro political context.  It is now worth considering how these events will manifest in terms of the planning process, as well as how developers can minimise the risk posed to financial viability in an improving, but decidedly difficult market.

Public sector spending cuts must follow whoever wins the General Election as the ‘public sector recession’ really begins to bite. The key impacts of this ‘new recession’ will be the effects on the public sector organisations that developers are required to engage with and the expectation that private development will provide a funding opportunity for public services and infrastructure. 

Services will be cut and creaking planning, surveying and housing departments will be put under further strain. The very existence of some quangos is under threat – the Conservatives for instance have confirmed their intention to abolish regional planning.  Barnet Council’s reforms give an insight into what public services might look like under a potential Conservative Government, being likened to the business model of a budget airline – a ‘no frills’ basic service with paid for add-ons. The concern is that ‘no frills’ becomes the default position and wider reform, justified or otherwise, increases uncertainty in a delicate market.

Development proposals will come under increasing demands for financial contributions to ‘gap fund’ service provision and infrastructure needs. During the ‘boom’, developers reluctantly accepted hefty, yet arbitrary, section 106 contributions as a price worth paying. In a recovering market, where viability is marginal, that will not be the case.  How Local Authorities will capture financial contributions in the future remains to be confirmed, but the Government are pursuing the Community Infrastructure Levy (CIL) and the Conservatives do not question the principle of CIL as long as levies are “simplified and localised”.  The Government proposes to scale back, but not remove, planning obligations through section 106 agreements, while in London the Mayor is using planning obligations for Crossrail funding. Whatever form these levies take, the financial demands placed upon new development by a cash-strapped public sector will be substantial.

The combination of reformed (or reduced) public services and tightening public sector finance will put new stresses on development proposals.  The challenge this poses to viability reinforces the need for developers to properly assess viability at the outset of a scheme.  It will be critical for the clients’ development advisors to set the architectural brief based on grounded planning, commercial and agency advice.

Major developments will be subject to numerous and competing claims for financial contributions. Developers will need to account for legitimate contributions but robustly challenge unreasonable claims. Local Authorities must understand that, despite their very real needs, development will be marginal in a recovering market and unreasonable delay or financial burden will likely bring a scheme down.  Council’s will therefore need to prioritise requirements and take a pragmatic approach to negotiations. The implications otherwise not only threaten individual development proposals, but also the renewed confidence within the development industry.

Even before the recession, developers were saying that the public sector needed to make larger contributions to large scale regeneration schemes. Now new forms of funding will need to be considered – we look forward to seeing Tax Increment Financing (TIF).

In the shorter term however, beware that it will be a long road to recovery for the development industry if Local Authorities squeeze development for further funds.