With the real estate market currently in a state of flux, it's essential that fund and asset managers find new and innovative ways to maximise assets and get the most out of property portfolios, argues Kinjal Patel.
A new buzzword in the property sphere, airspace development is an exciting and dynamic way to maximise your real estate investment. Put simply, the process involves building new homes on top of existing structures, with additional units constructed offsite before being installed on top of current residential or commercial buildings.
This method of building is gaining traction with government and housebuilders as a way to provide more homes across the country without having to identify suitable sites for development. The market-leading innovator in the sector, Apex Airspace, has received just under £20m of funding from the Mayor of London and Homes England in the first half of this year - as all levels of government look at new ways to tackle the housing shortage in the UK.
This is a major area of potential for asset managers with real estate portfolios looking to maximise the value of those properties. Research suggests there is enough suitable airspace to build 180,000 new homes above existing buildings in London alone, which could translate to major portfolio returns through additional rental and sale income. Your assets may be sitting under swathes of valuable airspace without you realising how much the air above their rooftops is worth.
However, there is currently a gap in the specialist expertise available in the sector, as most service providers simply don't have the experience to navigate the untrodden ground that a new and unique form of development entails. As Apex's exclusive counsel, the past two years has involved working side by side to navigate the legal and technical minutiae which are necessary for airspace development.
For investors considering maximising their portfolios through airspace development, there are key considerations which must be made now to make sure rooftop development is possible in future.
Get your house in order
Unlike building on traditional sites - often brownfield, vacant land - airspace development typically involves existing residential or commercial residents, which throws up myriad legal implications that must be addressed.
First off, for rooftop construction to be possible the building in question has to be structurally sound. It has to be technically feasible to construct and thereafter access and service the new units. The evaluation process has two phases: the preliminary assessment first looks at the local area, the market and the site itself to determine if a scheme can be both designed and delivered.
When the first stage is satisfied, we then establish a development model, considering the impacts on the building owner, as well as the existing residents, including evaluating how the newly structured building can be operated and managed when complete. Responsibility for making sure these assessments are satisfied ultimately falls to the building owners. Those managing real estate portfolios should make sure they are on the front foot by proactively ensuring their properties are suitable.
In our experience, it's particularly important to be alive to the challenges thrown up by negotiations with existing freeholders and leaseholders, planning impacts on rights to light, and convincing lenders and mortgage providers to engage with modular built homes, which come with distinct rights and warranties. While 95% of the airspace building process takes place offsite, there are still important considerations to make regarding the ‘right to quiet enjoyment' which represents another unique challenge. From a technical perspective, these potential issues stem from the fact that there are no standardised financing or planning documents for this form of development. Therefore, it is only through practical experience of negotiating the very nuanced and sensitive process that the solutions can be found.
Starting early means just that. Even before leases are exchanged, any designation or marketing of existing top floor apartments as "penthouses" needs to be carefully considered. Residents who have paid a premium for a top floor unit do not take kindly to being usurped at the top of a building as this can result in the devaluation of their property.
This consideration needs to come very early in the process. We use it as a primary example of the very standard practices in real estate that can often make rooftop building more complicated and present obstacles for investors making the most of your assets through the value of their airspace.
The insurance arrangements associated with airspace development are also complex and need to be carefully defined at each stage of the process to avoid issues should any insurable loss arise during the development process. Equally, property owners need adequate protection in the event of any default by the developer and where funders are involved their step-in rights have to be carefully balanced. Few asset managers and service providers currently have the experience necessary to manage these unexpected hurdles, and they are just a few of the many challenges which must be given due consideration.
These are complex arrangements, principally because the specifics of airspace development don't conform to standard documentation. These challenges can only be overcome by assembling an experienced professional team, who can navigate their way through the minefield of legal and practical issues which present themselves when undertaking airspace development.
Rooftop units may be the homes of the future, but in the here and now only a handful service providers and developers have the expertise necessary to deliver it. For fund managers in the property sector, getting ahead of that learning curve will be key to ensuring assets live up to their full potential.
Kinjal Patel is an associate in the real estate team at Winckworth Sherwood
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