ULI UK News

Rent Acquisition by Design?

paulcheshire20march

The event on 20th March started with an opening keynote presentation by Professor Paul Cheshire on a research he has been conducting with Dr Gerard Dericks, on rent acquisition by trophy architecture in London’s office market. The presentation began with the question: why are there so few tall buildings in London? Paul Cheshire went on to explain that the reason for this was the UK planning system: it restricts the supply of (office) space, by both height controls and restriction on locations in which offices can be built, and so creates the opportunity to acquire a premium, what is also called “a rent”[1], when a building gets the permission to build taller. Paul Cheshire’s also pointed out that the UK Planning System is an outlier in the world as planning decisions are politicised and extremely gameable; not ‘rule-governed’ as in say a Master Planning or Zoning system. Thus, the combination of planning restrictions with the possibility of gaming the planning system creates an incentive for “rent seeking” behaviours by developers.

A former study by Ann Krueger (1974) showed that the idea of rents (generated by regulatory supply restriction) was suboptimal in welfare terms and that resources employed as firms or people attempted to acquire those rents, led to deadweight losses for society unless there were other social gains to it. In London, a plausible method used to acquire rents available in development is “Trophy Architects” (TA). Hence, the underlying hypotheses of Cheshire and Dericks’ research was: can developers acquire rents by employing famous architects? This hypothesis suggested two interrelated questions:  are famous architects able to build bigger buildings because they are famous? And if so, what is the outcome: does it generate a social gain beyond just “acquiring rents” or does it lead to a deadweight loss for society?

To answer the first question, the authors started by developing a rather precise definition of what is a trophy architecture. They looked at architects who had won  one of three lifetime achievement awards (RIBA, AAA or Pritzker Award) and then at buildings located somewhere with no absolute height restriction in London. From a sample of 850 office buildings of which 115 were designed by TAs but only 19 were built at a date and on a site that was not absolutely height restricted.  The research found that these ‘modern’ TA buildings outside height protection areas had an average extra 17 floors on a given site.

Additionally, and unlike previous studies, this study found that there was no evidence for a premium paid for commercial space in TA buildings (in terms of capital values). The absence of premium paid for TA design suggests no productivity benefits for tenants.

However, TA added values to the site by reason of the extra space they were able to build: in fact, a 144% increase in the value of a typical City of London, non-Height controlled site  due to the extra rentable space. To have a full picture of what this meant, the research looked at the construction costs of TA buildings and measured the extra costs associated with them. Still, a £59 million economic “rent” was found for a representative trophy architect building compared to a standard building.

But, Paul Cheshire eloquently explained: “most economists tend to assume there are very few large denomination bank notes lying around on city streets waiting to be picked up”. Which means that the economic rent obtained is a compensation for the extra visible and invisible costs, risks and delays of gaming the planning system and is, in fact, a deadweight loss for society.

Paul Cheshire finished by raising the hypothesis that the dead-weight loss associated with TA could be (very) partially offset by the external welfare benefits for residents and tourists of having TA buildings in London.

A panel of experts, moderated by Chris Choa, Vice President of AECOM, gave their own insights on Professor Paul Cheshire’s presentation.

Yair Ginor, Director at Lipton Rogers, mentioned that it is important to look at the planning system not only in a technical sense but also in a political sense, and this way understand that it reflects the values of the larger society. He also reported finding the definition of TA a bit limiting, citing as examples buildings by architect firms such as KPF or PLP and architect Eric Perry, which would not be considered as TAs. Finally, Yair explained that the key contribution of this research for him was that it points out the weakness of the planning system: it is not a masterplan based system which means that every design, building must be judged on its own merit. In his experience, the desire to mitigate risks pushes both planners and developers to use famous architects for high buildings.

Jonathan Manns, Director at Colliers, commented that the research depicted the planning system in a particular way which in his experience is partial: yes the system is flexible, but new developments have to comply with adopted local plans and policies, which are in fact quite specific. Jonathan believes that it is helpful to have a trophy architect for a site but it is not necessarily only about the branding but also about presenting a good quality application and scheme, with a wider team of consultants.

Finally, an ongoing research by UCL with developers in Hong Kong and Cyprus is showing that the UK Planning System is envied because it does deliver a good and vibrant city.

Dennis Schoenmaker, Economist and Global Research at CBRE, reported being puzzled by the research findings that there is no premium paid back in the capital value of the building. He also suggested that it would be interesting to add as a variable whether these buildings were built by foreign investments as they tend to acquire bigger sites in London.

References:

Anne Krueger (1974) ‘The Political Economy of the Rentseeking Society’, American Economic Review 64(3): 291-303.

‘‘Iconic Design’ as Deadweight Loss: Rent Acquisition by Design in the Constrained London Office Market’ by Paul Cheshire and Gerard Dericks, Spatial Economics Research Centre (SERC) Discussion Paper No. 154 (http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0154.pdf).

[1] For the little story, rent is an old economic term first used by David Ricardo at the time of the Napoleonic wars and broadly means “something paid above the price essential to secure the services of a factor or good”.

Words by Pauline Niesseron, Department of Geography & Environment, London School of Economics.

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