Westminster wining

We’ve been having some discussions at work about the production of professional guidance.  It would look bad if a member of the RICS appeared as an expert, independent witness at a planning appeal using RICS guidance to support the case of their client – without declaring that they had effectively drafted the guidance!  This is not a totally hypothetical scenario.

Members of the RICS are regularly involved in the production of guidance, information papers etc. for the RICS which they then use in their business.   My colleagues ask me where else is the RICS supposed to get expert input?  Fair enough – but is it appropriate for such guidance to be then portrayed as independent or neutral?   At the very least, there’s a governance issue here that needs to be addressed.  In viability appraisals in development management, is it really the role of the RICS (or a clique within it) to decide what “a competitive return to the land owner” should be given how crucial a public policy issue it is?   Don’t get me wrong, the Islington SPD on viability and the Mayor’s guidance also have skin in the game and they’re also fighting for a specific interpretation of “competitive return to the land owner” that suits their interests. Who then can produce independent guidance?

It was a couple of articles in the Guardian that got me thinking of this issue the other day.  Both were on the role of lobbyists in the planning process.  Gerald Eve featured in one article that highlighted the cosy relationships between Shard developer Jim Sellars and the head of Westminster’s planning committee, Robert Davis.

In common with most developers planning something ambitious, Sellar had also hired a firm of planning and viability consultants to help him secure permission. Gerald Eve is a consultancy that offers developers “imaginative and thought through planning strategies” and promises to optimise “the outcome of the planning process”…Davis already knew about Gerald Eve. A month earlier he had been a guest of the firm’s drinks reception in Cannes, France, during the MIPIM property fair, where developers, local politicians and investors mingle on moored yachts and in hotel bars.

I like to think of it as an informal pre-app discussion. Just imagine if Gerald Eve were writing the viability guidance!

Tamasin Cave’s piece on the same day identifies the (increasing?) propensity for local councillors to often act as consultants on development projects (usually in nearby boroughs).  They are likely to have the contacts and lots of specific knowledge.  It can be a valuable commodity for a developer to get a better understanding of the local politics of the planning process – but it feels dodgy too.

…people need to have a proper look at what is happening in their council. Take a look at the registers of interests to see if any of your councillors double up as lobbyists. Get hold of the registers of hospitality and see if they are taking from the developers they should be overseeing. Use freedom of information law to dig deeper into who is meeting whom, and what they are seeking to do, and then hand the information to your local paper.

Always good to learn more about the development process.


Vintage land banking

I do appreciate that the land banking debate goes much further back (at least to the 1970s)  but I’ve only recently come across this blogpost on land banking from 2011.  It refers to the similar New Zealand experience.  It’s also good to be reminded that my former lecturer and colleague, Professor Alan Evans, has analysed the issue a long time ago and done it with his usual rigour and clarity.

Land Privatisation

It’s a pleasant surprise to see Professor Brett Christophers appearing in the Guardian today with an article on the biggest privatisation that you’ve never heard of – the privatisation of public land.

All told, around 2 million hectares of public land have been privatised during the past four decades. This amounts to an eye-watering 10% of the entire British land mass, and about half of all the land that was owned by public bodies when Thatcher assumed power. How much is the land that has been privatised in Britain worth? It is impossible to say for sure. But my conservative estimate, explained in my forthcoming book on this historic privatisation, called The New Enclosure, is somewhere in the region of £400bn in today’s prices. This dwarfs the value of all of Britain’s other, better known, and often bitterly contested, privatisations.

The article is based on a forthcoming book.  There’s a barely implicit presumption that this decrease in land ownership is purely a negative.  There are lots of arguments for and against the public ownership of land and there’s a debate to be had about the balance between “the market” and “the state” in land markets (in the same way as part of the broader economy).  This doesn’t really come through in the article.  However, it may well do in the book.  You get a good sense of the issues in the lively comments section after the article (as long as your can skim past the trolls).  Here’s a sample of the counter-arguments.

Much of the MoD land sold off was effectively stolen (either purchased at knock down prices or appropriated) for the War effort (both wars)…Airfields, old army and navy bases have been sold off. The NHS had a large number of mental hospitals… shut down for “care in the community” and the land has been sold off as many were in their own parks in edges of towns now suburbs, so prime sites for housing…Nationalised industries like the railways, coal board and GPO had vast amounts of land, and pretty much all the old goods yards, collieries, yards and telephone exchanges have been sold off for housing. Isn’t that a good thing?…Keeping land in public ownership in a derelict state when there is a great need for housing is often the result of people employed to “look after” State resources which if they owned them themselves they would never have neglected. Private property is developed – the dead hand of the State neglects property.

The comments section also included some stark data about the concentration of land ownership in the UK in a fairly small number of private hands.  There is a debate to be had about how much land the state should own or control and what form this ownership or control should take.

There seems to be a presumption in some quarters that the state needs to own assets to ensure the land and housing markets operate, er, appropriately.  This seems to be because the right to housing is widely regarded as a fundamental right.  But – so is food.  It’s interesting (to me) that there seems little call for the state to own farms, supermarkets etc.  Possibly there is less market failure and much more risk of government failure in the food market compared to the housing market?

WeWork Hypsters?

I saw a few things recently on Wework’s valuation.  I was actually in one of their offices (WeWork Moorgate) last week.  I liked it.  I could see myself working in that type of environment. I also see more mainstream office owners trying to copy the model.

Anyway, as I stated above, the latest drive by WeWork is to manage existing space on behalf of occupiers.  Essentially they are entering the market for outsourced FM – though you never see the words “outsourced FM”.  There was a really readable piece in Wired a few months ago that provided what was, in my view, a fairly Panglossian take.  However, it’s a good read that has a lot to say about the changing nature of work space.

Disrupting the Land Market?  

It’s very early days but it’s notable that it’s now a Labour Party policy supported by prominent Conservative politicians to reform the Land Compensation Act 1961. This Act effectively forced local authorities to pay land-owners the Market Value of their land assuming that it had planning permission.  According to Robert Booth in the Guardian, the proposed reform

would be enabled by a change in the 1961 Land Compensation Act so the state could compulsorily purchase land at a price that excluded the potential for future planning consent.

For agricultural land, this could involve local authorities buying agricultural land for housing development  at closer to its existing use value (say £20,000 per hectare) rather than its Market Value with permission for residential development (say £1,000,000-£3,000,000 per hectare).  If you don’t have to pay millions for the land, you can build a lot more houses.

It’s hard to see such a radical policy being implemented.  Obviously, there’s a lot of powerful vested interests in the current system.  Land owners, the RICS (acting in the public interest?), housebuilders, the HBF, the BPF etc. would fight tooth and nail.  They have a lot to lose.

I can see three main alternatives

Model 1:  Is the status quo – all developers (public and commercial) pay the Market Value for the land with large wealth transfers to land landowners.  Land value capture occurs through CIL and s106 contributions (mainly affordable housing).  All land owners on sites that get planning permission are winners.  Owners of sites that don’t get planning permission remain losers.

Model 2 would involve the compulsory purchase of some development land for social housing by the state at Current Use Value alongside development of market housing with planning obligations on other land on the same terms as the current regime.  We then have two sets of land owner losers (paid EUV by the state) or owners not granted permission and one set of land owner winners (paid Market Value by commercial developers).  This looks like the proposed model.

Model 3 would involve compulsory purchase of all development land for social and market housing by the state at Current Use Value.  A proportion of land would then be sold to commercial developers with planning obligations etc. and receipts used to fund for social housing.   We then have no land owner winners but lots of new housing.










WeWork’s Space Bubble?

According to the FT Lex, WeWork are now the biggest tenant in central London.

The numbers behind the company should alarm competitors. WeWork was valued at more than $20bn by its last fundraising. That is eight times the market worth of veteran rival International Workplace Group, which has 10 times the locations.

As I’ve said before, those figures would alarm me far more if I held WeWork shares.  I hadn’t realised that Regus – famously brand conscious – had rebranded.

Anyway, serviced office space (co-working space etc.)  – no matter how funky – tends to have high levels of operational gearing with high fixed costs compared to variable income.  As Lex states

The flexible space market is risky and operationally intensive. Turnover is high, and any company that rents out space for shorter periods will be left on the hook in a downturn. That did not stop US buyout group Blackstone buying The Office Group for £500m or British Land, the UK’s second-largest real estate investment trust, from setting up Storey, its own flexi-brand, which offers space from the company’s portfolio.

Given WeWork’s success, it’s not surprising that it’s being imitated.  British Land’s offer reminds me of Land Securities’ Landflex and Arlington’s (Goodman) Workspace products in the early noughties who were attempting to copy the “success” of Regus.

After my facetious call to short WeWork, I realised that I can’t because it isn’t listed (Duh!).  It’s hard to know how WeWork is performing financially.  There’s a report on the web suggesting that between October 2014 and the end of 2015, WeWork’s finances in the UK looked like this according to copies of its accounts filed with Companies House:

  • Total revenues:£13.6 million
  • Leasing costs:£18.3 million
  • Net loss:£14.4 million

Whilst the commentators who wrote the above stated that the fit-out costs were likely to be one-off, I suspect that the leasing costs may also include rent free periods and other lease incentives.

I like the concept but it looks very vulnerable.

Zombieland 2: Losing the Plot

In the latest edition of the Journal of Real Estate Finance and Economics, one article caught my eye

House Age, Price and Rent: Implications from Land-Structure Decomposition

Yangfei Xu, Qinghua Zhang, Siqi Zheng & Guozhong Zhu

I’ve been doing some work recently on local land value capture through planning obligations in London.  Clearly, land value has become a more and more important component of the value of a house.  Basically. the plot has tended to become more valuable relative to the actual built structure.

I had a bit of a rant a while back about the persistence of causality misapprehension that high land prices cause high house prices and not vice versa.  It’s a fallacy that keeps coming up in very prestigious journals.   The authors in the above paper state…

Researchers have become increasingly aware that house price should be decomposed into land price and structure price. Glaeser, Gyourko and Saks (2005) suggest that house price appreciation since the 1970s has been largely driven by increasing land costs in the U.S. Based on the land-structure decomposition, Davis and Heathcote (2007) infers the land price from data on house price and structure cost for US cities, which helps explain trends, fluctuations and regional variations in the price of housing. Similarly, Bostic et al. (2007), and Bourassa et al. (2011) focus on the land leverage of houses (the ratio of land to total value); both find that land value accounts for a large share of total home value, and that this decomposition can help explain price fluctuations, regional differences and other important issues in the real estate market. In this paper we explore this land-structure decomposition from another perspective that complements the existing literature. It has been widely observed that in many big cities land price tends to increase in value faster than structure price due to land scarcity.

I was surprised to see that people as eminent as Ed Glaeser could make such elementary errors.  Actually, they don’t.  I went back to look at Glaeser’s (et al) paper (a dry, but interesting micro-economic analysis of the role of local community groups in stopping new development).  It actually concludes that

In contrast, new construction has plummeted and housing prices have soared in a small, but increasing number of places. These changes do not appear to be the result of a declining availability of land, but rather are the result of a changing regulatory regime that has made large-scale development increasingly difficult in expensive regions of the country.

It is the limited supply of housing and high prices of housing (albeit partially) that is causing high land prices.  High house prices cause high land prices and not the other way around.  Developers pay a lot for land because they can sell the houses for a lot.  They don’t sell the houses for a lot because the land cost them a lot.  Developers, no matter how much they’d like to, can’t control house prices.