How to Tap into the Investment Zones Initiative
The government has announced a new policy that will allow a range of local authorities to set up Investment Zones (IZs). These potentially offer a range of financial and regulatory advantages that could help bring forward both commercial and residential development. Below we summarise some key characteristics and draw upon our experience of similar programmes to set out potential opportunities and pitfalls/risks.
Who Can Bid and What Role for the Private Sector?
All combined authorities and upper tier local authorities in England can bid to designate land as IZs[1]. (This is not just limited to the 38 authorities with whom the government has had discussions to date). The government expects similar arrangements will be confirmed in Scotland, Wales and Northern Ireland subject to devolved decision making.
Local authorities are strongly encouraged to secure ‘business sponsors’ ready to lead and drive investment opportunities. We take this to mean partnerships with landowners, developers and key occupier businesses will be beneficial. Our experience is that there are strong advantages in tapping into private sector proposals and work but that it can also lead to complexities over public sector requirements to demonstrate they are not unduly favouring specific private sector organisations.
Elements of IZs
IZs have many elements in common with Freeports and Enterprise Zones (EZs). Key relevant characteristics include:
-?????????100% business rates relief for newly occupied business premises for 10 years
-?????????100% council retention of rates growth for 25 years
-?????????100% first year enhanced capital allowances
-?????????Enhanced structures and buildings allowance
-?????????Employer national insurance contribution relief on new employees paid up to ￡50k pa
-?????????Stamp duty land tax (SDLT) relief ‘for land and buildings bought for use or development for commercial purposes, and for purchases of land or buildings for residential developers’.
-?????????Possible grant funding
-?????????Simplified town planning requirements.
The total package is potentially attractive enough to influence the location and possible scale of growth.
Of the above measures we have found that the one that could generate the most significant investment sums on larger commercial schemes is the 100% rates retention to local authorities over 25 years. In principle this could be capitalised and the local authority could use prudential borrowing to pay for significant infrastructure investment to unlock development. However details will need to be worked out and agreed, for example including sharing of development risks and guarantees of future rates income. (The same option is open in EZs and Freeports. For example we are working on behalf of land owners to firm up details for the Solent Freeport).
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Range of Eligible Activities and Relevance for Housing Development
Based on the information so far on IZs there are no definitive restrictions on the types of activities eligible for inclusion. In Freeports these are fairly tightly defined and intended to be orientated toward export related and higher value added activities. In contrast a wider approach can be taken in IZs, for example allowing large distribution centres, provided relevant value in achieving growth is demonstrated.
The benefits of IZs for housing development are currently less clear than for commercial schemes. Most of the business related incentives will not apply. The most relevant elements are SDLT relief, possible grant funding, and planning reforms. Details of planning reforms are not confirmed yet but for example might include reduced thresholds triggers for environmental impact assessments. We understand that the government will be putting forward a Planning & Infrastructure Bill soon.
The EOI Stage and Push for Ready Projects
The expression of interest (EOI) form has been published and applicants have until 14th October 2022 to submit these. It is clear that the government wants to prioritise schemes that can be delivered quickly and with good chances of going ahead. This is likely to mean that they will prioritise more worked up schemes, so proposals that already have planning permission or planning applications submitted are strong, and ones that are allocated in local plans will generally be preferred over unallocated schemes. It will not be possible to work up full details of ideas to the short deadline. It is likely that emphasis will be placed on developing fuller propositions at the next stage of the process.
Working up the Full Proposition
After the EOI stage there will be a fuller submission and assessment process. Details are not confirmed yet, but such processes usually follow a structure set by the Treasury’s Five Case model, i.e. setting out the strategic, economic, financial, commercial and management cases for the proposals.
Questions will inevitably arise on whether IZs are just displacing investment from elsewhere and/or that would have happened anyway. Whether IZs genuinely create new growth and activity will depend on the degree to which local markets are demand or supply constrained, and whether they are addressing market failure and viability gaps. We have been working on a range of commercial development projects assessing the degree of supressed demand in local markets and such analysis can help inform justification for IZs.
Current guidance also emphasises an approach where economic benefits are calculated via a land value uplift (LVU) to society approach (which has some differences from a typical residual land value assessment developers would use). We have worked on a range of projects assessing LVU and have found that such effects can be substantial but that the analysis and concepts can easily become involved. Published government guidance has not kept pace with actual practice in appraising proposals which adds further lack of clarity.
The government requires all schemes to be ‘Subsidy Control’ compliant. ?In general this usually means they should demonstrate a market failure and that the IZ measures help bridge a gap between unviable and viable development. Projects should fit in a Goldilocks zone sitting between viable schemes without support and schemes that are so unviable that they represent poor public sector value for money. It is possible that bids at some stage in their approval will be required to demonstrate residual value and/or cash flow appraisals to justify the need for support. A general point the private sector should take on board is that the process needed to secure benefits and funding are often involved and protracted.?Nevertheless if handled well IZs represent significant incentives to development.
Savills contacts
Rory Brooke, m 07972 000 007, e [email protected]
Danny Collins,?m 0787 018 3452, e [email protected]