Written evidence from CB Richard Ellis
Limited
BACKGROUND
1. CB Richard Ellis (CBRE) is the largest commercial
real estate adviser in the world, offering a full service real
estate in more than 300 offices worldwide. Within the United Kingdom,
CBRE has more than 25 years experience advising both public sector
and private sector clients on all aspects of Enterprise Zone strategy,
development and investment. Since the 1980's, CB Richard Ellis
has been involved in more than £1 billion of transactions
in UK Enterprise Zones, and is appointed to advise on a number
of the "final" Enterprise Zone developments which will
be undertaken prior to the termination of such status in April
2011.
2. As we understand it, there is not yet any
detail of the proposed structure which any new Enterprise Zone
in Northern Ireland might take or the range of benefits which
may be available. Accordingly, this submission reflects our experience
of transacting business within the UK Enterprise Zones since they
were first introduced in 1981. It also takes particular cognisance
of our relevant experience in the Northern Ireland market where
we have a local presence and are one of the leading real estate
firms operating in the region.
3. UK Enterprise Zones offered a range of fiscal,
financial and administrative incentives as a means of stimulating
economic activity and employment creation within areas of the
UK where industrial decline had caused significant unemployment,
especially through the loss of traditional industries.
4. The first UK Enterprise Zones (EZs) were designated
in 1981, the last in 1996. In total, in the period to 1996, 36
EZs were designated, each for a period of 10 years, during which
a series of benefits were available within the defined land boundaries
of each EZ. The benefits typically included:
- 4.1 Exemption from Development Land Tax (benefit
superseded by removal of DLT in 1983).
- 4.2 100% initial allowances in relation to
qualifying expenditure.
- 4.3 100% relief from commercial rates (but
not water rates).
- 4.4 A simplified planning regime. Projects
which conformed with a published planning scheme for each EZ would
not require planning consent in the normal manner but would be
able to apply for a "deemed consent".
- 4.5 Certain relaxations in the need to provide
statistical data to public sector agencies.
5. Of these benefits the most significant and
most valuable were (4.2) and (4.3). These are individually in
some cases and collectively in many cases sufficiently powerful
incentives to influence development decisions.
OBSERVATIONS OF
THE OPERATION
OF PROPERTY
MARKETS WITHIN
ENTERPRISE ZONES
6. We have listed below some general observations
and recommendations based on our experience of advising on and
observing the operation of EZs in a number of jurisdictions, predominantly
in the UK.
- 6.1 In our experience, the granting of EZ
status over an area of land generally has the effect of increasing
the value of that land. In the earliest EZs, land in the ownership
of both private and public sector entities was designated. In
later EZs, only land in public ownership was designated to avoid
private sector windfall gains. This latter approach should be
considered in Northern Ireland, if relevant.
- 6.2 We advise that care should be taken to
ensure that the land designated for the EZ is capable of development.
In some of the UK EZs, land remained undeveloped during the entire
designation period when the benefits of such status might have
delivered better outputs had an alternative site been designated.
- 6.3 In our experience, there is rarely a
direct linkage between the availability of EZ benefits and job
creation. The simple act of EZ designation does not in itself
create employment. However, we have found that the benefits of
EZ designation if utilised efficiently within a financing structure,
can produce lower property occupancy costs or higher incentives
for a property occupier. Those reduced costs, when considered
alongside other support mechanisms, may improve the viability
of a particular project attracting a business to locate within
the boundaries of the EZ.
- 6.4 In many cases, we have found that the
benefits of the EZ designation are not a direct and immediate
advantage to new inward investors. This is because EZ allowances
are not a grant, but an allowance. In practice and by way of simple
explanation, we brief clients to consider EZ allowances to be
the equivalent of a credit note which can be used to offset UK
Corporation Tax or UK Income Tax liabilities. Inward investors
that are new to the UK may, in the earliest years of trading,
have no, or only limited profits liable to UK tax. Accordingly,
the benefit of such a credit note may be limited or deferred until
such times as the inward investor generates sufficient taxable
profits.
- 6.5 In our experience, the majority of EZ
investment in the UK has been provided by Collective Investment
Vehicles (Syndicates, Limited Partnerships or Trusts) comprising
high net worth investors. These vehicles are typically supported
by debt facilities provided by banks or other lending institutions,
secured against the buildings being developed and the future income
flows (rent or guarantees) available. The individual investors
within these collective investment vehicles will typically be
seeking to shelter a liability to income tax at the highest marginal
rate (recently 40%) and currently 50%. A sophisticated market
has become established for Collective Investment Vehicles of this
nature which are formed and sponsored by specialist investment
houses within the Enterprise Zone community. Current issues surrounding
the availability of bank finance for property development and
investment could have a negative influence on the pace of development
within a new EZ.
- 6.6 UK legislation prescribes that the original
designation period for each EZ was 10 years. A mechanism known
as "Golden Contracts" permits the initial allowances
benefit of EZ status to be extended for a further period of up
to 10 years where contracts for the construction of development
have been put in place prior to the expiry of the original 10
year designation period. The other benefits cannot be similarly
extended. Given that the latest EZ designation in the United Kingdom
was 1996, this would imply that the latest Golden Contract extensions
might run until 2016. However, the UK Government announced recently
that notwithstanding the Golden Contact periods which applied
to certain EZs, all would come to an end at 5 April 2011.
- 6.7 The growing gap between UK Corporation
Tax rates (trending lower) and UK Income Tax rates (trending higher)
would suggest that private investors rather than companies investing
in a new EZ would benefit more.
- 6.8 We can see that there might be a potential
mismatch between the future availability of EZ allowances in Northern
Ireland and the muted reduction in the rate of Corporation Tax.
The net worth of EZ allowances to a company paying Corporation
Tax at 12.5% would be 12.5 pence in the pound (based on qualifying
expenditure), whereas a top rate income tax payer would find the
same allowances to be worth 50 pence in the pound, a multiple
of four.
- 6.9 An issue that is not generally appreciated
is that in any property development, the benefits of EZ status
are shared between a number of parties, including the land owner,
the developer, the investors/owners and the tenant. No single
party would typically take full benefit from allowances and this
can result in the extent of the potential benefit being significantly
less than might be anticipated.
- 6.10 One of the benefits of EZ status in
the United Kingdom has been relief from general rates during the
initial designation period. Whilst this might appear to offer
an occupational cost saving to businesses locating within EZ property,
in a free market the rental levels for such property will increase
to absorb much of the benefit of rates relief. The impact of the
foregone rates revenue could have significant repercussions in
Northern Ireland considering the current economic situation and
proposed cuts to public sector and local authority funding.
- 6.11 As was substantially the case in the
period up to 2007 and to a lesser extent since 2007, the benefits
of EZ status have been used within financing structures to allow
significant speculative development to take place. It is important
that the EZ agencies have a control mechanism in place to allow
a balanced release of land and avoid the risk of the market being
over supplied, which could have substantial negative rather than
positive impacts for the medium to long term viability of commercial
property development within the Region where the EZ is located.
This is particularly pertinent considering the current weakness
in the Northern Ireland property market and the extent of supply
currently prevailing in the region.
- 6.12 Efficient use of EZ benefits in the
financing of property development (especially speculative development)
will require significant levels of bank debt and support. Given
the current attitude of banks to property lending, this is unlikely
to be readily available and could be a constraining factor on
the pace of development.
- 6.13 The granting of EZ status does not guarantee
the willingness of the private sector to undertake development
without additional support from the public sector. In certain
UK locations, especially EZs of poorer quality, additional public
sector support was necessary in some cases up to and including
long term head leases.
- 6.14 EZ status does not remove the risks
of property development and investment. Equally, it does not transform
projects which are inherently unviable into those which can be
taken forward on a commercial basis. Examples exist around the
UK of properties which have been developed with the benefit of
EZ allowances and which have never been occupied, indeed some
have been demolished prior to occupation. It is critical to ensure
that the sites identified for designation have the capability
to survive and thrive in their own right once the designation
no longer applies and incentives are removed.
- 6.15 Not all commercial property qualifies
for EZ allowances in the context of current UK legislation. A
qualifying building is defined as a commercial building or an
office building. A commercial building must be one which is used
for the purpose of a trade, profession or vocation thus, situations
can arise when non-trading occupiers wish to occupy commercial
buildings other than offices and would be declined as an occupier.
Certain industry sectors are also excluded in terms of EU law.
- 6.16 UK EZs include provision for a simplified
planning regime. Typically, the planning regime for each site
within the EZ will specify a range of uses considered acceptable
by the planning authority and the EZ authority. Where a development
is proposed which accords with such use(s), then the developer
will seek confirmation from the planning authority that its proposals
accord with the scheme and are thereby given a deemed consent.
Care needs to be taken that the process of obtaining a deemed
consent does not replicate the typical planning process, thereby
negating the benefit of such a relaxation.
- 6.17 It should also be borne in mind that
notwithstanding the uses permitted within the planning scheme,
there is nothing to stop a land owner or developer making application
within the normal planning framework for a use or uses which fall
out with the scheme. The planning authority would in such circumstances
typically deal with such an application as a standard "non
EZ" application. In this context there can sometimes be a
tension between the EZ objectives and the general planning process
however, provided the control of the land is initially vested
in the public sector then irrespective of any planning consent
which might be granted through the normal processes, the public
sector land owner can decline to release the land for development
unless the development proposal fits the wider EZ objectives.
In our experience, the simplified planning regime is rarely the
predominant factor attracting developers or indeed occupiers to
EZs with the financial attractions generally having a higher weighting.
- 6.18 In UK EZs, certain uses are prohibited
under EU regulations. These include ship building, steel making
and various others.
- 6.19 There is no doubt that many of the EZs
in the UK served to kick start a process of regeneration which
would not otherwise have been possible. In some EZs the momentum
established by EZ status has continued after the end of the designation
period whilst in others the pace of development has either slowed
or come to a virtual halt. Whilst it may be tempting to view EZ
status as being generally appropriate for the areas of most significant
economic challenge (and EZs could play a part in these areas),
long term success is most likely to be achieved where the extent
of market failure is less severe and there is the realistic prospect
of a sustainable market after EZ benefits have ceased. We know
of instances where EZ buildings have been constructed and, having
lain vacant for virtually the full designation period, now face
demolition.
RECOMMENDATIONS FOR
NORTHERN IRELAND
7. The Northern Ireland economy and property
market are at a critical juncture just now. Economic conditions
are challenging; the rate of unemployment continues to increase
and the public sector, which has been the dominant employer and
occupier of commercial property in the region for many decades,
is facing significant cutbacks. The region has many positive attributes
including high quality infrastructure, 100% broadband penetration,
a highly skilled and well educated workforce as well as house
prices, occupation costs and wage costs that are significantly
below other locations in the UK. Despite very significant improvements
in competitiveness in the Republic of Ireland over the last two
year period, property prices and wage costs remain significantly
more competitive north of the border. However, the existence of
a 12.5% corporation tax rate in the Republic of Ireland is undoubtedly
impacting on Northern Ireland's ability to attract large scale
multinational companies to set up operations in the region.
8. If Northern Ireland is to compete with the
Republic of Ireland and encourage more foreign direct investment
and create much needed jobs, measures such as the introduction
of EZs and a lowering in the current rate of Corporation Tax in
the region are needed to enhance the attractiveness of the region
and encourage occupiers and employers to locate here. Based on
our experience in the Northern Ireland real estate market, we
believe that commercial activity and job creation would increase
if either of these measures or a combination of them were introduced
in the region.
We suggest that:
- 8.1 As in many other EZ designations, we
suggest that a number of different sites should be designated
in Northern Ireland. While designation will bring about the regeneration
of run down and deprived areas of the region, the focus has to
be on job creation and we would not advocate identifying sites
purely on the basis of social or economic deprivation. Sites must
be selected on the basis that the locations and resulting development
will be viable, notwithstanding the EZ benefits being removed
after a ten year period.
- 8.2 We would advocate developing speculative
accommodation on the EZs but in the current depressed market this
must be a controlled process and ideally where a specific end
user or market shortfall is identified. We would advocate that
EZ designation can aid specific key sectors such as Renewable
Energy, Pharmaceuticals' etc.
- 8.3 There are specific areas in Northern
Ireland where land is in public or quasi public ownership. Extreme
consideration needs to be given to specific areas and one designation
is certainly not a remedy for all. For example, we would cite
the Boucher Road area of Belfast, the freehold of which lies with
the City Council. Light industrial and logistic operators now
struggle to benefit in this area due to a large number of retailers
locating therein and thereby driving ground rent pricing. A blanket
designation on this area would also benefit retailers and would
not address the current problems. However, individual designation
of areas within the Boucher Road could help industrial, logistical
and employment generating uses to compete with neighbouring retail
land users.
- 8.4 Another specific example may be the Harbour
Estate in Belfast. A blanket EZ on the Harbour Estate could well
benefit and increase productivity on the Port side and for light
industrial and logistical users but would not necessarily be relevant
for the benefit of private developers building apartments and
retail units on land currently in part ownership with the Harbour
in Titanic Quarter.
- 8.5 There are a high number of sites throughout
provincial towns in Northern Ireland which are Local Authority
owned and earmarked for development briefs. The availability of
enterprise status to these individual sites may well mean the
development is possible rather than economically challenged by
lack of funding. Again, we would stress development should only
be encouraged where there is an identifiable end user.
- 8.6 The impact of a lack of bank finance
in the Northern Ireland market. We believe is creating a major
barrier to job creation. Where a devised zone status can incentivise
activity, it must be encouraged.
- 8.7 EZ designation is sometimes regarded
as a "label" or "brand name" but we believe
it is a mistake to categorise it as such. In terms of deemed planning
status alone, the creation of zones may have a knock-on benefit
in removing work from an already overstretched planning system.
- 8.8 On its very lowest level, a designation
of EZs within Northern Ireland creates interest in the location
and a competitive edge within the Republic of Ireland already
benefitting from local Corporation Tax. We believe the introduction
of EZs in Northern Ireland may go some way towards the re-occupation
of space in the industrial, light industrial and logistics sector
and indeed can also be used to promote areas for the regeneration
of office stock or specialised uses such as a medical campus.
- 8.9 One of the concerns that will undoubtedly
arise at a local level is the cost of implementing EZs. While
the Exchequer will have to bear the cost of granting capital allowances
and local authorities forego rates revenue, the expenditure on
land and infrastructure could be mitigated somewhat if lands that
are already in public ownership are designated.
28 January 2011
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