Managing Strategic Development Land in Times of Market Stress

While the crisis in the credit markets continues, strategic development land remains a reasonably robust and tradable investment. Investments that take a long-term speculative view rather than looking at short or medium-term yield remain largely unaffected by the current economic turmoil. So landowners whose property has ‘hope value’ for future development should not lose heart.

But what should landowners do to protect their assets and provide the best chance for development value to be realised?  The short answer is to ensure that their land is being promoted for development to best effect through the forward planning process.

The new Local Development Frameworks that are replacing former Local Plans are still works in progress in most areas of the country and, as such, can still be influenced. These Frameworks generally take a longer view than in the past, although they should be updated on a regular basis, which makes it important to engage in the process as early as possible and maintain that engagement.

Under the new forward planning process, the evidence base that needs to be presented to local authorities in support of the promotion of land has to be provided earlier - another reason to start promotion in earnest at an early stage. The drawback is that the costs of promotion are increasing as more evidence on a wide range of matters, from landscape and ecology to transport and sustainability, is required. Those costs are also becoming increasingly ‘front loaded’, which means that they often occur before there is a clear steer from local authorities as to the policy direction they might favour taking.

For many landowners, the cost of promoting land for development remains a barrier to entry. Initial stages of promotion that can cost perhaps around £50,000 can spiral upwards to hundreds of thousands if progress is made in the right direction and promotion is pursued to its conclusion. Significant sums to risk on such a speculative venture. The alternative for those that would not wish to take this level of risk remains to bring on board a development partner to pay some or all of the costs in return for a share in the uplift in value should promotion be successful.

Despite the current economic gloom, there remains a reasonably good market for options, joint ventures and other forms of promotion agreements. The essential elements of all these being that landowners retain ownership of the land until the promotion has been successful and at that stage receive the majority but not all of the development value that has been established. An alternative to this is to sell the land but retain an interest in future development value. However, the price achieved on sale has been falling to levels that make this a less attractive route. Whichever route suits the circumstances, it cannot be emphasised enough how vital it is to have specialist professional advice to arrange these complex agreements and transactions.

One overriding concern in the selection of a developer partner is to ensure that they have the resources and the will to pursue the promotion of your land in the long-term. Usually, idea is to reach the successful conclusion of a planning permission, as this is where the principal return for the landowner lies. So in most circumstances selecting the right partner should outweigh the size of any immediate premium or fee that might be received in return for the agreement. However, such payments are still being made at significant levels by speculators and developers to secure control of strategic development land, and receiving the appropriate payment in any given circumstance should not be ignored as part of an overall deal.

Landowners with agreements already in place should be monitoring the performance of their development partner on a regular basis and taking appropriate action if it seems that they are not fully promoting land.

Landowners should not fall into the trap of assuming that, because an agreement has been made and there is a developer ‘on board’, that the developer is working hard to promote the land. In the current economic climate, many developers are cutting costs and in the short-term, reining back or stopping expenditure in promoting other people’s land seems an easy cut to make. But, land still needs promoting and managing.

The forward planning process rumbles on, in many ways oblivious to the economic circumstances today, and owners of land with that special twinkle of development potential need to be engaged in that process. This means either accepting the costs of promotion by appointing your own team of professional consultants, or finding an appropriate development partner to foot the bills. Whichever approach is taken the process needs monitoring and managing.

Taking the long-term view and reacting appropriately to every stage of the forward planning process remains vital in the management of strategic development land and, although few are confident enough to predict when the current economic downturn may end and growth might be restored, that long-term view has kept the market for such land reasonably robust.