Development Partnerships: Can existing infrastructure cope with new development?

Charlie Dugdale, Partner, Development Partnerships 

I'd argue that, currently, people are not simply ‘anti-development’ but are concerned that existing infrastructure will be unable to cope with new development. These concerns are often founded on experience, be it ambulance wait times, crammed daily commutes or traffic jams on the school run. It's no surprise then that the Government has shifting away from addressing the housing crisis with new towns and planning reform, towards the UK Infrastructure Bank and the Levelling-up & Regeneration Bill. Investing in infrastructure won't be so much about adding demand to failing services, but rather lessening these pressures and stimulating the growth of jobs and opportunity.

One of the popular solutions to the pressures facing local authorities is to promote a new settlement. The thinking goes that it will solve the housing target pressures without impacting too many people, and the land value uplift can be captured through investment in local services. Unfortunately, 2022 was the year that the financial incentive for delivering a new settlement was stretched to breaking point. New settlements are delivered by master developers whose revenue is selling serviced land, and whose cost is building infrastructure. But serviced land values have been falling, and infrastructure costs have increased dramatically. At the same time, the discount rate increased in line with 5-year SWAP rates. All of this has impacted the viability of these projects. 

We must address the common misconception that the larger the development the more infrastructure it can support, when in fact, the reverse is true. Small developments that plug into existing infrastructure are far more profitable. Local Government has an incredible opportunity to positively engage with new sources of funds and with developers who are actively seeking to deliver the right development in the right place.

Engaging constructively means climbing over the table and sitting alongside master developers. It also means understanding viability and what projects can afford. The alternative is not only to misunderstand the electorate, but also cause more stalled development, less investment in infrastructure, fewer businesses being given the platform to thrive, and fewer homes for people to live in. That future is unconscionable.

Debt Advisory: 2023 spells opportunity for debt market

Craig Wilson, Partner, Debt Advisory

2022 did indeed stretch the viability of development to breaking point. In particular, 5-year SONIA swap rates (the fixed rate that receivers demand in exchange for the uncertainty of having to pay short-term floating rates) which increased from less than 1% a year ago, to over 5% following the September mini-budget. While SONIA swap rates have now returned to levels seen in early September 2022 (5-year SONIA swap ~3.95%), the economic turmoil in 2022 has significantly impacted development viability.

In terms of infrastructure funding, Homes England can offer infrastructure loans through their Home Building Fund (HBF), providing financing for any non-housebuilding activity needed to unlock large sites and enable partners to use their capital resources to deliver housing quickly. These types of activities include land preparation and enabling works, which can be more challenging to finance in the private debt market. Homes England will also be launching the long-awaited Brownfield Infrastructure and Land fund, which will provide further support for unlocking sites.

The all-in interest rate for HBF infrastructure loans comprise both the margin (the lender’s risk premium), and the EC Reference Rate (the floating reference rate published monthly by the European Commission). The EC Reference Rate increased markedly from 0.51% in January 2022 to 2.77 in January 2023 – this loosely follows the 3-month SONIA floating rate. Unsurprisingly, the increased all-in cost of infrastructure loan finance has squeezed the modelled returns for a number of long-term master plan projects. The good news, however, is that a peak in the cost of debt is now anticipated to be less severe than many were fearing. At the time of writing, the 3-month compounded SONIA rate is forecast to peak at just over 4.70% in late summer 2023, before beginning a steady decline to align with European interest rates in 2030, establishing a 'new normal' for the cost of floating rate debt at just over 3.00%.

The beginning of 2023 will bring opportunity in the debt market as funding targets reset and lenders will be required to re-enter the market. Given the depth and breadth of lenders in the market now (compared with the Global Financial Crisis of 2007-08) there will be competition to fund the best assets and lenders will offer greater flexibility on pricing and financial covenants.

Public Sector Advisory: Public sector must put greater focus on ESG and work harder to ensure responsible investment 

Maddie Chelsom, Senior Surveyor, Public Sector Advisory

We saw the cost of corporate borrowing skyrocket in 2022, as did personal finances and borrowing – whilst spiralling inflation has created a mounting cost-of-living crisis. In November, the Chancellor was successful in stabilising the markets, offering support to those worst affected and maintaining balance between the credibility of the Government’s financial management. But at a local level, the public sector needs to work much harder with its money and assets to ensure responsible investment into well-advised developments with a long-term stewardship approach.

At Knight Frank, we've seen more public sector emphasis placed on Environmental, Social and Governance (ESG) issues – particularly on the Environmental element of that wheel. Progress has been made towards reaching Net Zero targets, but there needs to be more of a focus on Social Value and Governance going into 2023.

Pressure on local authority revenue budget is greater than it's ever been. The provision of revenue generating services through a Teckal Company is not enough to cross subsidise inflationary pressure on general fund expenditure. The 22/23 extension on use of flexible capital receipts for revenue expenditure has helped fund transformation projects that produce long-term cost-saving to service delivery. However, does the disposal of an asset protect public interest, and should Government do more to allow local authorities the flexibility to generate revenue receipts? 

The market continues to respond with more innovative funding strategies that help public sector bodies protect public assets, whilst helping ease the pressure on the revenue budget. We look forward to seeing better partnerships between the public and private sectors in 23/24, as well as more support and flexibility from Central Government to avoid more Section 114 Notices being served.

Rural Consultancy: 86% feel it's harder to recruit rural estate staff, says survey

James Shepherd, Partner, Rural Consultancy

In a year when inflation and interest rates took off like they hadn’t done for a generation, UK rural landowners added those concerns to their growing list – another key concern being the war in Europe impacting food security.

It was also the year that those seeking delivery of environmental projects and/or a continued safe-haven for their investments turned to agricultural property. According to Knight Frank’s Farmland Index, the record low supply of farmland openly marketed in 2022, combined with increasing pressures on demand, resulted in a 13% year-on-year increase in England’s farmland values.

Despite strengthening demand for farmland in 2022 (particularly for ESG-themed tree planting or other carbon offsetting projects), the availability of labour was a serious concern, with 86% of respondents to our Rural Estate Staff Salary Survey saying it was harder to recruit staff.

Looking ahead, it seems likely that the public sector’s ability to recruit and retain rural estate staff will come under greater scrutiny. The gulf between private and public sector wage growth is significant and the viability of running full service in-house rural estate teams seems set to be tested. Yet there are reasons to be optimistic. Delivery of green infrastructure will march onwards in 2023 and some of the themes crossing the desks of in-house rural surveyors are easy to predict – including carbon, biodiversity net-gain and tree planting – whilst others, such as nutrient neutrality and flood alleviation, are more niche and geography dependent.

Some of these themes will offer genuinely rewarding roles for surveyors and will allow the public sector to play their part in re-imagining what a rural surveyor does in the 21st century. Our research shows that an increasing number of candidates interrogate potential employer's ESG policies before accepting a role – so the public sector should certainly not be selling itself short on how well it performs in this area. 

Town & Country Planning: Rise in planning application fees likely, and energy sector set for boost

Stuart Baillie, Head of Town Planning

The effects of inflation and build-cost challenges significantly impacted the planning system in 2022. Under-resourced planning authorities continued to experience a significant post-lockdown increase in householder applications, which masked the declining volume of larger-scale planning applications and project starts – particularly for new residential development. This slowdown was influenced by development viability and new policy considerations in building safety, carbon neutrality and biodiversity net gain. Nutrient neutrality was another significant restriction on new development in 74 local authorities across England.

Meanwhile, Michael Gove and his ‘Levelling Up’ agenda survived three Prime Ministers and a backbench rebellion. He's gone to war with mainstream housebuilders in recent months – accusing them of operating a monopoly on land and manipulating the supply and cost of new homes. He's also backtracked on mandatory housing targets, while maintaining a 300,000 homes per annum delivery aim for England. Requirements have also been relaxed for Local Authorities to produce up-to-date Local Plans that demonstrate a five-year housing land supply, while great weight has been placed on Neighbourhood Plans. The idea of ‘street votes’ has been introduced, with the aim of increasing local influence on planning policy and decisions. 

Looking ahead to 2023, planning application fees are likely to increase, with Councils being given greater autonomy to increase fees. Whether that income will be ring-fenced for their own planning resources (to help address chronic under-resourcing) remains unclear. 

Larger scale housebuilding projects may become more challenging in the medium term, with Planning Committees likely to feel more empowered to reject housing growth where it is remotely controversial. This may result in more ‘planning by appeal’ and Knight Frank’s Planning team is being asked by developer clients to prepare for a planning appeal scenario from the outset.  

For the reasons outlined above, we don't anticipate a speeding up for Local Plan Adoption, particularly when it comes to areas with development land supply issues. What we'll likely see is more supplementary planning guidance relating to design, carbon reduction, circular economy and assessment of ‘retrofit’ options.

Energy security needs are likely to provide a significant boost to the energy sector. Whilst fracking was back on the agenda under Liz Truss, this has been rejected by the Sunak administration. The recent Secretary of State’s approval of a new coal mine in Cumbria certainly raised environmental eyebrows. Nuclear remains part of the Government’s long-term solution and there now seems to be an acceptance from Government that ‘on-shore wind’ infrastructure must be harnessed to secure cleaner energy supplies.

Adapted from an article published by ACES Terrier.