It’s finally official. From 12 February, incorporating biodiversity net gain (BNG) into all major real estate development will be mandatory.
BNG marks a significant shift towards sustainability and ecological responsibility, but comes with financial commitments that impact the entire development industry. So what is the real impact of BNG on real estate development profitability and finance, land values, project timelines and planning – and what is the best way to navigate it?
New conditions
Broadly, the new risks to development come in two areas.
First, there is the impact on land values. BNG offsets operate in a graded system – some habitats are more costly to replace than others, which makes some schemes more costly to deliver and impacts land value.
In particular, the cost of mitigating the loss of complex habitats, such as open mosaic habitat on previously developed land, can substantially reduce the value of brownfield development sites. Developers need to take into account the cost of meeting BNG rules when assessing the viability of a site. Developers are legally obliged to maintain onsite habitat for at least 30 years.
The planning practice guidance encourages authorities to require developers to provide a BNG strategy before granting consent. While it is not universally mandated by law, some will require the developers to identify the specific offsets they will use as part of this BNG strategy, while others will just require the broad approach.
Where identification of specific offsets is required, developers may have to commit capital even earlier in the development process to secure specific offsets before formal planning approval is secured. This means new financial risks, as reservation fees can be lost if planning is denied.
Minimising BNG risk
Combined, these two factors mean additional costs come earlier in the development process and affect development margins, cost of capital and overall viability. The timing of these costs can significantly influence the equity commitment necessary to finance a development.
But there are ways to mitigate.
Early calculations: Developers should seek to understand the potential cost impact of BNG as early as possible in the site appraisal and development design process. Avoiding sites with costly habitats and designing sites to minimise impact on high-value habitats will reduce project BNG costs.
Negotiating payment terms: BNG offset providers can offer financing options that extend part of the cost further down the development timeline. However, this is not universally available, and the terms can vary significantly between providers, LPAs, and habitat types.
Mitigating onsite: Onsite mitigation can push a significant amount of the cost down the development timeline. However, what the developer gains in improved cash flows can be outweighed by the complexities of the additional long-tail liability.
The developer has a legal commitment to maintain the onsite habitat for at least 30 years, with potential enforcement actions by LPAs for non-compliance. To meet these obligations, developers typically establish management companies (to charge service charges) or endowment funds to cover the costs of habitat management and monitoring.
Buyers of the development will need to assume this liability and will need to be satisfied that the ongoing plan for managing and monitoring the mitigation is sufficient.
Assignment: Certain BNG contracts and mechanisms give developers the ability to assign BNG offset units across developments, or resell them to other developers. In these scenarios, these units can become assets on a developer’s balance sheet, reduce the risk of capital loss (if planning is unsuccessful), and introduce opportunities for financial gain or the ability to hedge future price rises.
Onsite partnerships: Some developers will propose significant onsite BNG mitigation, and will choose to gift it to a mitigation provider or management company to remove the ongoing liability. To adopt the scheme, these companies often require an endowment to cover the cost of managing the habitat for 30 years.
Option contracts: Wild Capital (a national BNG provider) offers option contracts to developers. Options enable developers to push back the cost of reserving offset units, and hedge against future price rises or availability shortages. The options give greater flexibility, as they can be assigned across developers and developments.
Evolving landscape
In all scenarios, knowledge is power, and developers should have a firm handle on the costs their developments may incur.
BNG is a critical component of real estate development’s evolving landscape and cannot be ignored. While it presents financial challenges, it also offers opportunities for innovation and sustainability.
Developers, planners and environmental authorities must collaborate to strike a delicate balance between environmental stewardship and financial viability. The industry must adapt and explore innovative financing models and transparent regulatory frameworks. By navigating these challenges effectively, real estate developers can contribute to a sustainable future while maintaining profitability.
Wild Capital has published a free guide to BNG for developers downloadable here, which includes an index of the current market offsite offset costs to mitigate the loss of habitats.