Commercial Property and Planning in a Credit Crunch

As the international banking world experiences significant disruption and as the effects of this spread beyond the housing market into the general economy, it is interesting to reflect on how the commercial property world and the associated land use planning system are responding. 

Commercial Property

Les McAndrew, Commercial Partner at Graham and Sibbald in Edinburgh, comments that a fellow partner remarked the other day “what a difference a year makes!”  His retort?  “Never mind a year, what a difference a day makes!”  Who would have believed a year ago that Lloyds TSB would buy a distressed HBOS, Lehman Bros would be bust, the banking system would be partly nationalized, and RBS Shares would be at 80p. Now the only sure thing is that “cash is king”; it is in short supply and those that have cash can potentially harvest rich pickings in the current commercial property market.

Right now there is a familiar daily conversation:

BUYER:  What’s your asking price?

SELLER:  (say) £2M

BUYER:  I’ll give you £1M!

SELLER:  Sorry, that’s not enough.

BUYER:  Well come back and speak to me when it is enough.

If advising the seller, you know that in the current market you are inevitably going to have that price reduction conversation some months, weeks or in extreme cases in a matter of days down the line.

If advising the cash king buyer, then you can drive a hard bargain, but if you want to achieve a deal in this market, whether it be for an investment, a development site or an owner-occupation unit, there still has to be a sense of realism on both sides.  The seller has to accept a hit on his price aspirations.  The buyer, equally, can’t screw the seller completely into the ground, otherwise the seller has nothing to lose by trying to hang on or indeed going down the route of insolvency if the end result is more palatable than simply taking a severe financial hit.  In other words, even in these turbulent times, there still has to be a “win-win” situation created for both parties, especially if you want those parties to be still speaking to each other in the good times.

With all the recent dramatic news and despite the head saying that there is still some more pain to be inflected on the market for the rest of 2008, and perhaps for much of 2009, the heart can’t but help wish that perhaps now might be the time for some of the cash rich investors/developers to start buying, sensibly and selectively.  If things decline further, any deal struck now is unlikely to settle for several months, giving the buyer the chance to withdraw or adjust the price.  If the market improves, however, and that would not be difficult, then a deal struck now might look to be a smart piece of business, particularly taking into account this weeks 0.5% cut in the base rate.  A few serious deals in the marketplace by serious players would go a long, long, way to installing some real confidence.

It would be nice to look back positively in a year’s time and say “what a difference a year makes?”

Land Use Planning

And if those deals start happening will development follow? Ian Kelly, Head of Planning at Graham and Sibbald, feels that despite the banner headlines in every newspaper, the pronouncements from Ministers and “high level summits”, the perception is that the public sector planning system seems to just carry on as before. The convoluted process of implementing the new Act continues. The September update on the implementation programme has not yet been published, nor have the Development Planning Regulations been laid before Parliament. Local Authorities continue with the slow process of producing over lengthy Development Plans, whilst the Development Management function, under resourced and under skilled, continues to try to control the minutiae of our environment whilst struggling to cope with the tremendous challenges of major applications. It cannot be an easy time to be a Local Authority Planner yet, to the development industry, it feels, at times, as though the planning system exists in a parallel universe. Certainly, there has been no overt and specific recognition that we are in changed times and that these changes need a change in the planning culture.

Moving Forward

So, can these deals that Les envisages produce development on the ground?

The planning system in Scotland cannot be accused of causing the current crisis. However, there is a clear opportunity for the planning system to respond positively and aid the process of economic stabilisation and recovery. That can start with Ministers and the Heads of Planning committing, in public, to a clear presumption in favour of development unless there is demonstrable harm to interests of acknowledged importance. This does not need new legislation. A simple rewrite of the principles in SPP1 will suffice. Councils should then produce, within 2 months, informal statements of positive planning policies and opportunities.  These informal statements could also identify the equivalent of enterprise zones where Councils will positively promote compliant development with a very light regulatory touch. Planning Officers can then look to rapidly assess and approve wealth creating applications. Finally, Ministers can look to kick start a number of strategic infrastructure projects.  

The private property sector must play its part too in this process. That means well thought out, financially robust, well designed and well justified proposals. It also means, critically, that the private sector must be willing to lend some of its most able people to the public sector so as to help deliver the current culture change agenda, to deliver these immediate responses, to help break down the public/private sector divide that is to the overall detriment of the system, and to help deliver sustainable economic growth on the ground.

We can do this!