Brodies recently hosted a Housebuilding Conference where leading market experts discussed the key challenges and opportunities facing the sector, including planning and viability issues, funding challenges, land options, unlocking infrastructure constraints and the impact of alternative residential sectors on traditional development.
Planning issues continue to dominate with the majority of attendees anticipating delays in the planning system as the most significant barrier to housebuilding in Scotland in the next 12 months. Concerns regarding infrastructure constraints and costs were narrowly behind, with some attendees seeking increased dialogue and joint initiatives between developers, local authorities and utility providers. Surprisingly perhaps, when developers may struggle to find enough skilled workers to complete new schemes, only 2% of attendees placed Brexit at the top of their list of concerns.
A clear trend over the past few years has been the increased number of Scottish households in rented accommodation. The flexibility and mobility offered by the rental sector means that rental living is fast becoming the tenure of choice for a generation of millennials, rather than simply a stop gap for those who aspire to home ownership.
Whilst to date there has only been a limited uptake in participation in the Build to Rent sector by the major housebuilders, they will be keeping a close eye on this emerging market for any new opportunities. The same can be said for retirement living – not every older person wants to move from their existing home, but there are a number who are looking to downsize or to find the home which will cater for their long term lifestyle and healthcare needs. The demographics in Scotland suggest that this is a consumer who will be attracting the attention of the housebuilding sector in the years ahead.
Developments continue in the banking market as Brexit edges closer. The Loan Market Association (LMA) has published a guide on the future of LIBOR, and the ISDA standard documentation for derivatives is being revised.
The LMA and the ACT have produced a joint guide entitled “The future of LIBOR: what you need to know” on LIBOR benchmark reform. Reform is being sought after widespread allegations of LIBOR manipulation and fines imposed on international banks has led to increased government review.
A deadline of the end of 2021 has been set for reform to take place, but in the interim preparations must be made for workable alternatives to LIBOR. The guide looks at alternatives that are being proposed such as risk free rates, and also looks at how the drafting of the LMA documentation could change to accommodate LIBOR reform.
All eyes are on the Sterling RFR (Risk Free Rate) Working Group, set up by the Bank of England, who are tasked with considering the implications and providing recommendations in respect of an alternative reference rate to LIBOR. The transition to a new RFR will signal the end of LIBOR as we know it.
Existing arrangements which subsist beyond 2021 may require a re-papering exercise to take account of any changes to the benchmark rates. Where it is not possible to build flexibility into new arrangements at this stage, consideration of change procedures in documentation might be useful.
Law firms are being asked to work collectively on the issue of standard documentation and contractual fall backs. Take this link to some further detail on likely changes.
There are also ongoing discussions around Brexit in the derivatives market, particularly in respect of the current ISDA project to draft new Master Agreements, governed by French and Irish law respectively.
Although the choice of English law (being the current market standard along with New York law) should continue to be recognised, having master agreements which are governed by the laws of alternative jurisdictions situated in EU member states may be useful. The new ISDAs are in addition to general market modernisation initiatives such as the programme of legal opinions procured by ISDA in respect of electronic signatures and documentation.
The English opinion was issued on 10 April 2018 and other jurisdictions are to follow shortly. Brodies’ ISDA team will continue to monitor market developments in these areas and provide guidance and support to clients.
Scotland’s new financing institution is welcome news
The plan for the new Scottish National Investment Bank (SNIB) sends out a positive message. National investment banks are well known around the world and can work well. The most recent UK example was the Green Investment Bank (GIB), which ironically ended up more focussed on equity investment as the debt markets had enough liquidity to lend the finance required by the green projects that GIB was targeting.
SNIB plans have some similarities with the original GIB mandate, which is a good foundation. If one result of a SNIB is to work well alongside various other strands of public sector support for growth businesses then that would be a powerful outcome. If it results in a new funding flow to SMEs, then that would be even better.
The plan refers to “mission-based finance” and “transformative projects and initiatives” which sit alongside the stated growth capital objectives. If SNIB products can dovetail effectively with the long-term aims of the Scottish Government to produce new economic growth then that would be a very positive outcome.
One potential area is the delivery of the climate change strategy agenda. Here, the debt and capital markets may be struggling to support the financing of small-scale schemes on a long-term basis, but a SNIB product allied to commercial banks’ green finance products may be the way forward. This might achieve the necessary broadening of finance sources which is seen as needed to support energy investment needs.
SLC publishes report on Moveable Transactions
On 19 December 2017, the Scottish Law Commission published its three-part report on moveable transactions.The proposed reforms, if enacted, will create a flexible system which more readily meets the needs of modern commerce in Scotland and as such will have a significant impact on how finance is raised on moveable property in Scotland.
Key recommendations include are that there will be changes to the general law of assignations, with electronic intimation being recognised as well as a new form of security called a “Statutory Pledge” which could be created over corporeal moveables as well as some classes of incorporeal moveables.
Third Party Rights
On 26 February, the Contract (Third Party Rights) (Scotland) Act 2017 came into force. This legislation seeks to clarify the rights of those who are not a party to a particular contract however intend to benefit from the contract or wish to rely on it.
Importantly, there is a new statutory set of rules, which provides greater certainty as to how third party rights can be created and enforced.
Student Accommodation Market In Scotland Tops £100m
GVA’s annual Student Housing Review highlighted that transactions in the Scottish market for purpose-built student accommodation topped £100 million in 2017, and applications for housing increased for the fifth year in a row.
The most activity in Scotland was seen in Aberdeen, with £51 million worth of transactions. This was followed by Edinburgh, Glasgow and Stirling, with applicant numbers also growing. Glasgow saw the second-biggest increase in student accommodation in the UK – which was up by 16%.
The continuing strong activity has been attributed to the relative weakness of sterling, which has increased foreign student numbers. Additionally, the UK higher education system continues to be strong, and rental income has grown beyond inflation.