Exploring air rights in congested urban areas

When considering a new construction project, many developers would seek out a suitable plot of land or existing building that could be demolished and make way for the new development. However, there is a potentially lucrative alternative avenue developers could capitalise on - up in the sky.

What are air rights?

‘Air rights’ refer to the owner’s legal ability to occupy the vertical airspace above a property. These ‘air rights’ are an example of transferable development rights, meaning they can be sold or leased without the need to do the same for the physical asset itself.

Why is this important?

Prime development areas such as London or New York City are becoming increasingly congested in their main hubs, which can make locations for new development opportunities scarce. Transferable development rights therefore have the potential to present quite the opportunity for building owners, but it is thought that many are not aware that these rights exist. It is estimated that there are 23,000 buildings in London’s central zone 1&2 that would be suitable for vertical development, with the ‘air rights’ being valued at up to £51bn.

Implications for developers

For developers, purchasing of ‘air rights’ unlocks a host of new development opportunities, whilst inadvertently tying in quite nicely with the planning guidance published by the Mayor of London, making it clear their preference is the redevelopment of existing structures, rather than new build projects. These projects can be complex however and carry a significant level of risk. We have seen this at the highly successful Canon Place scheme for example, where a commercial office building developed at the time by Hines Real Estate, was constructed above a fully operating Cannon Street Station. Aside from the physical risks associated with these projects, contractual positions are also key, with these developments likely involving multiple stakeholders.

Insurance considerations

From an insurance standpoint, an increase in developments involving air rights could potentially lead to further uptake in contractual financial loss insurance, given many developments we have seen of this nature so far involve TFL or Network Rail assets. The developer may look to protect themselves in this way from the onerous indemnities around non-damage events included in asset protection agreements.

The complex stakeholder position would also further reinforce the benefit of an owner-controlled programme, noting the interest of all parties.

Early engagement with an insurance advisor is paramount, to encourage full review of all legal agreements involved and to ensure that the policies placed align with insurance requirements.

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