Residential regulation: Regulatory enforcement

Enforcement varies considerably by area and by regulation. For example Houses in Multiple Occupation and tenant deposit schemes are examples where legislation is obviously required to protect tenants. However as enforcement is often inadequate, good landlords invest time and money in compliance whilst bad landlords can ignore it without fear of sanction.

Why is this idea important?

Enforcement varies considerably by area and by regulation. For example Houses in Multiple Occupation and tenant deposit schemes are examples where legislation is obviously required to protect tenants. However as enforcement is often inadequate, good landlords invest time and money in compliance whilst bad landlords can ignore it without fear of sanction.

EU Derivatives Reform

In principle British Land PLC supports the EU’s aim of improving transparency and reducing the systemic risk posed by the OTC derivatives market. However, it is imperative that the regulation does not, inadvertently, discourage the use of derivatives for hedging purposes. The use of derivatives, particularly interest rate swaps linked to loans, is widespread in the commercial property sector and does not contribute to systemic risk but instead enhances market stability.

The European Institutions have sensibly judged that a distinction needs to be drawn between financial businesses (who can use derivates in a speculative manner) and other businesses including property groups which use derivatives to provide cash flow certainty. The problem is largely definitional: it is vital to use as narrow a definition as possible (for example based on MiFID regulation) and to ensure that all non-financial businesses rather than just SMEs are excluded.

Two other important changes to the EU’s current proposals are needed: first in relation to risk mitigation for non-cleared contracts, any new regime must take account of non-cash security (such as underlying real estate assets) supporting the contract. Second, information and clearing thresholds for monitoring and regulating the use of derivatives by non-financial undertakings should specifically exclude interest rate swaps used for hedging purposes as proposed under the equivalent US regulations.
 

Why is this idea important?

In principle British Land PLC supports the EU’s aim of improving transparency and reducing the systemic risk posed by the OTC derivatives market. However, it is imperative that the regulation does not, inadvertently, discourage the use of derivatives for hedging purposes. The use of derivatives, particularly interest rate swaps linked to loans, is widespread in the commercial property sector and does not contribute to systemic risk but instead enhances market stability.

The European Institutions have sensibly judged that a distinction needs to be drawn between financial businesses (who can use derivates in a speculative manner) and other businesses including property groups which use derivatives to provide cash flow certainty. The problem is largely definitional: it is vital to use as narrow a definition as possible (for example based on MiFID regulation) and to ensure that all non-financial businesses rather than just SMEs are excluded.

Two other important changes to the EU’s current proposals are needed: first in relation to risk mitigation for non-cleared contracts, any new regime must take account of non-cash security (such as underlying real estate assets) supporting the contract. Second, information and clearing thresholds for monitoring and regulating the use of derivatives by non-financial undertakings should specifically exclude interest rate swaps used for hedging purposes as proposed under the equivalent US regulations.
 

End the uncertainty of the EU AIFM Directive

Agreement on the EU AIFM Directive between the European Commission, European Parliament and Member States appears to have been delayed. This provides an opportunity to confirm that the real estate sector is excluded which would be consistent with the intention of those who drafted the legislation. The Directive is intended to catch the managers of all types of ‘funds’, subject to certain exceptions. It is not intended to apply to all businesses. In particular, it is not supposed to apply to ordinary industrial or other operating businesses. The boundary is uncertain and particularly so in the real estate context.

Why is this idea important?

Agreement on the EU AIFM Directive between the European Commission, European Parliament and Member States appears to have been delayed. This provides an opportunity to confirm that the real estate sector is excluded which would be consistent with the intention of those who drafted the legislation. The Directive is intended to catch the managers of all types of ‘funds’, subject to certain exceptions. It is not intended to apply to all businesses. In particular, it is not supposed to apply to ordinary industrial or other operating businesses. The boundary is uncertain and particularly so in the real estate context.

Simplify UK GAAP (Generally Accepted Accounting Principles)

In common with other members of the British Property Federation, British Land PLC supports the objectives in relation to the future of UK GAAP. However using IFRS for SMEs as the basis for UK GAAP is not the right approach because of the substantive difference between IFRS and UK GAAP and the onerous obligations of IFRS. The result is likely to be an overly complex and duplicating regulatory burden on SME businesses (Tier 1 reporters), particular when these are subsidiaries of larger businesses (Tier 2 reporters). The danger is that many companies will end up adopting full IFRS across their whole group despite the unnecessary expense.

Why is this idea important?

In common with other members of the British Property Federation, British Land PLC supports the objectives in relation to the future of UK GAAP. However using IFRS for SMEs as the basis for UK GAAP is not the right approach because of the substantive difference between IFRS and UK GAAP and the onerous obligations of IFRS. The result is likely to be an overly complex and duplicating regulatory burden on SME businesses (Tier 1 reporters), particular when these are subsidiaries of larger businesses (Tier 2 reporters). The danger is that many companies will end up adopting full IFRS across their whole group despite the unnecessary expense.

Residential regulation – Design Standards

There is an opportunity to reform and rationalise the number of residential design standards that apply to new housing. This would tackle the sheer number of standards that currently includes: Building for Life, Code for Sustainable Homes, Design for Manufacture, Lifetime Homes, Secured by Design and Design for London. 

Some of these standards appear subject to frequent change, for example over the last eight years, affordable housing in London has been subject to Scheme Development Standards, then Housing Quality Indicators, and now the new Design for London Standards. Many of these standards have entirely appropriate individual aims, but it is their cumulative impact that is problematic as they are increasing cost and complexity for developers, reducing the viability of individual developments, and ultimately resulting in reduced housing delivery.

The second problem is applying common standards to very different situations across the country. For example ‘Lifetime Homes’ are very much an appropriate standard in some locations, but not others. The third problem relates to the enforcement of standards. There is often no clear deliniation between planning departments and building regulations departments and conflicting advice between the two, as the Penfold Review points out.

Why is this idea important?

There is an opportunity to reform and rationalise the number of residential design standards that apply to new housing. This would tackle the sheer number of standards that currently includes: Building for Life, Code for Sustainable Homes, Design for Manufacture, Lifetime Homes, Secured by Design and Design for London. 

Some of these standards appear subject to frequent change, for example over the last eight years, affordable housing in London has been subject to Scheme Development Standards, then Housing Quality Indicators, and now the new Design for London Standards. Many of these standards have entirely appropriate individual aims, but it is their cumulative impact that is problematic as they are increasing cost and complexity for developers, reducing the viability of individual developments, and ultimately resulting in reduced housing delivery.

The second problem is applying common standards to very different situations across the country. For example ‘Lifetime Homes’ are very much an appropriate standard in some locations, but not others. The third problem relates to the enforcement of standards. There is often no clear deliniation between planning departments and building regulations departments and conflicting advice between the two, as the Penfold Review points out.