THIS MONTH’S WISE OWL
Mani Khiroya is the founder and CEO of Fruition Properties and has over 20 years’ experience in the London property market.
Passionate about airspace development, he is also one of the founding members of the Association of Rooftop and Airspace Development (ARAD) and is a leading voice in the sector.
Looking up for new opportunities
Airspace development has huge potential to unlock new housing above existing buildings and when done correctly, should bring benefits to the freeholder and leaseholders as well as the developer.
Unlike a new build, where the only hidden issues are in the ground below, with airspace you must contend with live issues, ranging from the people who live or work there, the existing building structure, the fire risks, health and safety and more. This complexity means there are many potential pitfalls to avoid for the developer but also for leaseholders.
Since the introduction of Permitted Development, this potential opportunity, combined with the lower cost of delivering a permission, has attracted more freeholders to seek to develop or sell the potential asset. Quite often this happens without consulting the leaseholders and without any benefit to those who will be most impacted by the development.
We believe it is much better for leaseholders to be fully on board before any site acquisition and be aware of, and share, the many benefits airspace development can bring.
It is also important that developers are aware of the rights of the leaseholders, where the leaseholders collectively don’t own the freehold. Together leaseholders will have the potential rights to acquire and develop the airspace themselves through enfranchisement, a specialist process which requires the assistance of lawyers and the appropriate funding, and could happen during the planning process if you are purchasing a site subject to planning.
In most scenarios the freeholder of the airspace will be required to give the tenants the opportunity to acquire the airspace on the same terms as being offered to a developer, and leaseholders will be served a Section 5 notice. But by working in partnership with leaseholders, rather than just for the freeholder, developers can reduce this downside risk by establishing the project’s overall financial viability prior to acquiring the asset. In doing so there is additional value created which can be shared with all parties.
This has become particularly important recently with greater market volatility, rising finance and builds costs. As well as being financially viable the building must of course be structurally viable and have the capacity to take the one or two additional floors.
As developers we should also recognise that clearly there will be disturbance to those who live in the property and therefore there should be some recompense. The benefits can be far ranging including updates to communal areas, new roofs, to contributions to sink funds for future works. Alongside this, airspace will need to consider the fire safety of the building and will result in enhancements to the benefit of all occupiers.
The addition of more units will mean that future costs are shared between more leaseholders providing a cash saving to each owner in the building. Such upgrades to an existing building, extends its lifetime so is a sustainable way of delivering new homes. The refurbishment works will also improve the value of all units in the building without any cost to the leaseholder.
These are just some of the complexities involved in airspace development but by working together developers, freeholders and leaseholders are well placed to maximise the many opportunities and benefits airspace development can bring.