A crystal ball gaze at the real estate landscape in 2024

Alison Murrin:

Hi everyone, my name is Alison Murrin and I am delighted to be joined by Richard Vernon, a partner in our real estate team to share his views on the real estate landscape for 2024.

The prospect of a general election next year makes predicting the legal landscape in 2024 for real estate more difficult, but we can draw on a number of key themes which are likely to gather steam during the course of next year and beyond.

Now Richard, I wanted to start by considering the implications of Rishi Sunak's surprise announcement in September which confirmed that the Government is scrapping its plans to require homeowners and private landlords of domestic property to have an EPC rating of C from 1 April 2025. This represents a major U-turn in government policy to improve energy efficiency in our private rented housing stock. The Government has effectively ruled out further regulatory measures in the rented domestic sector at this time although it has stated that it remains committed to decarbonising as many homes as possible "where practical and cost-effective."

The trajectory for raising the minimum energy efficiency standard (MEES) of commercial property still remains something of a mystery. All the Government is saying at the moment is that it has reviewed the responses to the 2021 consultation and is in the process of reviewing the policy design to ensure that it remains fair for both landlords and tenants and reflects the changing policy landscape. Apparently, we can expect that response in "due course". It's safe to say that the Government has acknowledged that the proposed timeline (EPC rating of C by 2027 and EPC rating of B by 2030) will have to be updated in order "to allow sufficient lead in time for landlords and the supply chain." But, where does that leave us?

Richard Vernon:

The Government's stance on building efficiency is interesting with 6 December being a built environment thematic day at COP28 in Dubai and we expect to see a key announcement that near zero emission and resilient buildings are to be the new normal by 2030 – which the UK is signing up to.

These recent announcements provide some clarity for the private residential sector but, it still means that we are none the wiser as to what the new policy proposals will be for commercial property. The commercial property sector faces an enormous challenge to address energy inefficiency. Current estimates are that close to 90% of current office space has an EPC rating of 'C' or below and approximately 1bn sq ft of space in the UK is below a 'B' rating. It is also estimated that around 60% of UK warehouse space will not achieve a 'B' rating come 2030.

Despite the lack of clear government policy guidance, investors need to continue to review their portfolios and plan a programme for energy efficiency improvements where it is cost effective to do so. Minimising carbon emissions will continue to be an important factor when developing, refurbishing and operating real estate assets. Action to improve efficiency might be why the latest Deloitte London Office Crane Survey reveals a record number of refurbishment projects –around 34 schemes are underway covering 3.3m square feet.

But with the clock ticking towards the UK net zero emission target by 2050 further action is needed, especially as the property sector will require substantial investment to upgrade commercial buildings in the UK, if it is to play its part in achieving net zero.

Alison Murrin:

Thanks for those insights Richard. Just to clarify that at the present time there is no evidence that there will be any changes to the introduction of the Future Homes Standard in 2025. The aim being that homes built or renovated from 2025 will produce between 78 – 80% fewer carbon emission than under the current building regulations. So, I presume that developers and investors should keep this on their radar too?

Richard Vernon:

Yes. This will essentially mandate the transition to low carbon heating and future proof homes. The Standard is a positive step forward for the residential market. If implemented correctly, it will be an important reference point for valuers. However, there is a risk that the costs of implementing the Standard will feed through to increase prices if, for instance, higher standard building fabrics raise costs. Still, the benefits of decarbonised UK housing will be felt by residents, as increased energy efficiency reduces the costs of bills and contributes a cleaner environment.

Alison Murrin:

That seems to be a very positive step. We should also mention that the Government has also pushed back on yet another key green policy, with a target for developers to achieve biodiversity net-gain at sites no longer coming into force this year but instead it will be some time in 2024. What are the consequences of this delay?

Richard Vernon:

Of course, some developers have already set their own biodiversity net-gain targets out for some or all developments, but others have been waiting for the mandate.

At the start of the year, the UK Government confirmed that developers will need to achieve 10% biodiversity net-gain (BNG) at all large domestic, commercial and mixed-use sites from this November. The BNG was first introduced as part of the Environment Act back in 2021. The Government has described BNG as "making sure the habitat for wildlife is in a better state than it was before the development". In essence complex metrics will be applied to calculate how much habitat needs to be provided to achieve the 10% net gain required. Statutory credits can be purchased from the government as a last resort.

However the Government has announced legislation will no longer be implemented this year. The Government has since confirmed the 10% BNG target will come into force in January 2024. BNG for small sites will be applicable from April 2024, and implementation for Nationally Significant Infrastructure Projects is planned for 2025.

As already mentioned a number of developers, both large and small have been gearing up for this change for years. But, the industry really needs certainty and commitment in order to facilitate green investment and continue to make progress, so it is good to see that the Government has now published the draft regulations setting out the framework for implementing biodiversity net gain through the development management process.

Alison Murrin:

And I suppose we can't really leave the talk on green policies without touching upon the proposals to relax the rules on nutrient neutrality that were rejected by the House of Lords in September. For the time being it appears that nutrient neutrality is here to stay. But, how do we unlock stalled developments?

Richard Vernon:

The frustration of developers and planners with the existing nutrient neutrality policies is palpable. These policies include a moratorium on housebuilding in most local authorities, which seem to target only residential and commercial developments. This is despite other significant industries like agriculture and the water sector contributing substantially to water pollution.

The Autumn Statement did announce plans to spend £110 million (to be known as a local nutrient mitigation fund) to support councils to deliver high quality schemes to offset nutrient pollution, which may help unlock stalled planning permissions.

Alison Murrin:

Thanks Richard. I wanted to briefly mention one other legislative development in relation to the UK's net zero pledge and that is the Energy Act 2023 which received royal assent on 26 October 2023. What are the key areas of this Act that are relevant to real estate?

Richard Vernon:

The Act is essentially enabling legislation to provide powers for government to implement future legislative changes. It is a key step in the UK's energy transition.

The real estate sector will no doubt be closely following developments in the areas of heat regulation, energy savings opportunity schemes, energy smart appliances and further energy efficiency obligations. In this way the property industry will be best placed to adapt and take advantage of opportunities as they arise.

Alison Murrin:

We should move on to other developments in the real estate sector we should mention the King's Speech which revisited a number of leasehold reforms which have been on the agenda for at least the last 4 years, but the Government now seems committed to bring forward these reforms in the Leasehold and Freehold Reform Bill. Among other things, this proposes to:

• Make it cheaper and easier for existing leaseholders to extend their leases, buy their freehold and assume management of their properties.
• Push standard lease extension terms out from 90 years to 990 years.
• Remove some of the barriers to enfranchisement, abolishing the 2 year ownership rule and, for mixed use properties, increasing the 'non-residential' floorspace limit from 25% to 50%.
• Increase transparency around leaseholder service charges.
• Ban the creation of new leasehold houses – which should not come as a surprise as it has been on the horizon for some time.

Do any of these proposals raise any issues in your mind?

Richard Vernon:

Most of the changes will not be news to anyone in the industry but, one area that may concern freeholders is the extension of the non-residential limit from 25% to 50%. If these changes are to be retrospective then existing buildings which have been specifically designed to avoid enfranchisement and RTM applications could now be potentially caught and will cause concern for commercial investors.

There was also a promise to consult on capping existing ground rents. The consultation has now been published, but makes no mention as to how landlords would be compensated and at what rate. Whilst this is only a consultation rather than legislative change , any capping will be a concern for ground rent investors. It will not be easy balancing the interests of those who legitimately have a right to receipt of ground rents against the desire to reduce the financial burden on leaseholders.Certainly one to keep an eye on as the Bill passes through Parliament.

Alison Murrin:

And, of course we have to mention the Renters Reform Bill which is carried over to next year. As we discussed this time last year the bill is aimed at reform of the private rental sector. Among other things it proposes to:

• Provide greater security and flexibility to renters.
• Introduce stronger powers to evict anti-social tenants.
• Make it illegal to have blanket bans on renting to tenants in receipt of benefits or with children.

Can we expect any meaningful progress of these reforms?

Richard Vernon:

Clearly, plans to abolish s.21 no-fault evictions are still on the table but as set out in the notes the government will: "not commence the abolition of section 21 until stronger possession grounds and a new court process are in place". Whilst the abolition of Section 21 notices has not been taken off of the table and the government has committed to abolishing such notices, their eradication has been once again delayed. This just increases uncertainty for investors as to when and how the rules will apply.

In considering the impact of the bill it is important to highlight the exemption for purpose built student accommodation as long as the provider is registered for government-approved codes. The Government has also reasoned the exemption of PBSA from the regime as it is “clearly defined, tenants do not have an expectation of the accommodation providing a long-term home, and robust rules to maintain standards already exist.” Therefore, it will remain possible to let PBSA on fixed-term tenancies.

Alison Murrin:

It's finally here. 17 months in the making, but the Levelling Up and Regeneration Act 2023 is now officially law. It covers a wide range of planning and infrastructure issues, and implementation will require a great deal of secondary legislation.

How much of and how quickly the new Act actually comes into effect will depend on the government's priorities; capacity; and the lead-up to and outcome of the general election. Labour have already said that it would produce their own Planning Bill within 100 days of leadership.

It is a major piece of legislation which aims to deliver the Government pledge to "level up" the United Kingdom. During it passage through parliament it grew in scope and there are some specific real estate points to note which are not planning related changes. Could you just remind our listeners what these are?

Richard Vernon:

As it stands the Act is part of the Government's aim 'to deliver a revitalised high streets and town centres and gives local authorities up and down the country powers to force commercial landlords to let their property.

The new legislation will enable local authorities to offer short-term leases of qualifying commercial units via an auction if they are vacant for longer than 12 months.

The finer details still need to be fleshed out in secondary legislation.However Landlords who have commercial premises should assess their position. This also presents an opportunity for tenants to acquire leases of previously unavailable vacant premises. It will certainly be interesting to see which local authorities take advantage of these new powers.

The Act also sets out a framework allowing the Secretary of State to make regulations requiring the disclosure of information about land interests. This includes information about contractual rights, such as who holds them and how they were created. Potentially this could cover sale contracts, agreements for lease, options, pre-emption agreements, promotion agreements, development and forward funding agreements. We don't have much information at the moment until the secondary legislation is published. But, potentially a person who fails to provided the required information will commit a criminal offence .

Ultimately this is seeking to reduce the extent to which land ownership, control and transactional information can be kept confidential.

Alison Murrin:

It will be interesting to see how this is framed in secondary legislation. Another Act which has been the subject of copious secondary legislation is of course the Building Safety Act 2022 which is one of the biggest legislative changes to the UK building industry in close to 40 years. Since it came into force we have had to get to grips with a completely new building safety regime and the most recent changes came into force on 1 October this year. It is hugely important that all those involved in the real estate industry understand the new duties. Richard, could you briefly summarise the most recent changes?

Richard Vernon:

We now have a detailed building control regime for higher-risk buildings ("HRBs").and what must be included in applications submitted to the Building Safety Regulator ("BSR") before the construction of new HRBs and for works to any existing HRBs. Approval from the BSR must be obtained before building work on HRBs may commence.
Competency is also a key part of the new regime – from 1 October 2023, everyone carrying out design or building work (and not just in respect of HRBs) must be 'competent' and demonstrate their competence. This means having the skills, knowledge, experience and necessary behaviours

The BSR becomes the building control authority for all new-build HRB which means that local authorities and approved inspectors will no longer be able to supervise higher-risk building work.

The gateway regime, which fully came in to force on 1 October 2023, is one method of seeking to improve quality standards by providing regulatory oversight to the planning, design and construction process.

It is also important to point out that the BSR has extensive enforcement powers for non-compliance which can result in fines and possible imprisonment.

There is no doubt that the new statutory regime is complex but we are all on a continuing journey to deliver the crucial purpose of this new regime.

Alison Murrin:

Thanks Richard. The Building Safety Act really does represent a sea change across the industry. It has been so interesting to hear your thoughts on this and all the other many and varied issues that are going to be part of the real estate landscape in 2024 and beyond.