A bunch of fives for John Prescott

The plan sets out an ambitious vision to create sustainable communities in the Thames Gateway, and thriving housing markets in the North and Midlands. From Benwell to Barking, Prescott is relying on private sector contractors, developers and institutional pension fund managers to make it happen. The ODPM has said that just to deliver the priorities in last summer’s Comprehensive Spending Review would require £10bn of private sector cash, and this is a sliver of what will be needed over the life of the communities plan. The plan is backed by £40bn of public funds, but the ODPM admits that “it is the private sector that will deliver the new homes and jobs of the communities plan”.

But just how likely is it that the deputy prime minister will be able to rely on the private sector to fund his grand plans? On the following six pages Stuart Macdonald offers five spending messages the government should take on board before it gets out its credit card and punches the industry’s PIN.

Message 1

‘Spending has to be focused where returns can be made’

London’s Hanover Square is home to many of the UK’s property firms and consultants. The talk in their grand old offices is of declining residential yields, when the office sector may perk up again and where the next big deal is coming from. There is some concern that the recent review of the ODPM’s programmes, embarked on by David Miliband, the newly installed local government and communities minister, will result in the government’s regeneration ambitions being scaled back. However, politicians changing their minds is nothing new to the property industry – they price it into their schemes all the time. Indeed in certain quarters it is seen as no bad thing that the government may perhaps be about to become more realistic about what it can promise.

“We in the private sector surely haven’t got enough money in the pot to do all the regeneration that the government wants,” says Richard Donnell, head of research at property consultant Savills. “You can’t regenerate everything – there simply isn’t enough funding. For the government to get anything out of this at all, it needs to focus funding on where the private sector can make a return.”

So what exactly is it that will catch the eyes of those in the private sector who hold the purse strings, and will they build what the government wants? Donnell points to the slowing housing market as one factor that is exercising minds in Hanover Square just now. “In a slower market we do need to revisit what our priorities are. If the private sector is delivering most of regeneration schemes, that are frequently residential-led, and these are experiencing slow rates of sale, then what will happen? Will the public sector step in to a greater degree? Given the stance being adopted by Miliband, this seems unlikely. Regeneration has to be market-led. There’s no way the public sector can do it all.”

Message 2

‘There aren't many big spenders for the big schemes’

Tim Seddon is head of community development at developer Land Securities, which has embarked on what is perhaps the Thames Gateway’s boldest scheme, a 20-year project to build 30,000 homes in the new communities of Kent Thameside, in the boroughs of Dartford and Gravesham.

Seddon says his firm is not overly concerned about a short-term dip in the residential market. He believes developers can make money from regeneration in the long term by building precisely the sustainable communities John Prescott wants – mixing land uses between office, retail, leisure and residential. “The communities plan is undoubtedly moving us towards doing residential schemes. But then to make a development truly sustainable, you also need to build retail and office elements. The values for us are in taking on this risk and doing it for the long term. To be honest it really depends on what other choices the board have on offer at that time for making money, and right now this is it,” says Seddon.

A glance at the long-term returns for the key drivers of regeneration schemes – retail, office and residential (see pages 17 and 18) – shows why Seddon and his board are prepared to take the risk. The average return across the property industry last year was 18% and although it is likely to be less this year, the longer-term return of 12% is far healthier than what has been made on, for example, the stock market in recent years. It is on regeneration schemes that the major opportunities for developing future projects will emerge over the next few decades and so this is where the action will be.

Financial clout

Seddon, however, adds an important caveat and one that the government would do well to heed. “There are very few property companies that could pick up a 20-year project like Kent Thameside and have the financial clout to make it work.”

For Terry Fuller, head of the affordable housing group at the Home Builders Federation and whose members are emerging as key players in kick-starting residential-led regeneration schemes, this is crucial, and is likely to mean that the funds will not be there to do everything that is required in the timescale desired by Prescott. “There are more competitions for schemes out there than the industry can properly resource just now,” he says.

“In terms of the people putting schemes together and in terms of the capital you need, there simply isn’t enough to go round. As a result there are only a few developers that have the financial clout to do these large schemes: Bellway, Countryside, Taylor Woodrow, Barratt and Berkeley. The bottom line is that schemes have to be attractive. As there is so much choice out there just now this is not that hard for us to find.”

Fuller says developers’ main concerns when appraising a project centre around the record of the local authority with whom they will be working. They are wary, too, of the involvement of quangos such as English Partnerships and the Housing Corporation: “To what extent will they stick their oar in and where’s any additional funding such as subsidy for affordable housing going to come from and how much will it be?” asks Fuller.

Schemes have to be attractive. As there is so much choice out there just now, this is not hard for us to find

Terry Fuller, Home Builders Federation

The general message is that although a local authority may feel the scheme or competition it is promoting has everything going for it as an investment, it may lose out simply because there are not enough bidders to go around. A number of projects – such as the redevelopment of the South Acton Estate in London’s Ealing – have had to extend the length of their tender in the European Union’s Official Journal for this very reason.

Message 3

‘We need delivery bodies that we can understand’

“The amount of money we are talking about coming from the private sector into regeneration is simply enormous,” says Pete Wilson, managing director of regeneration consultant Tribal Urban Futures. Wilson is a man who should know. Just that day he and his colleagues have met, among others, builders, bankers and even a certain J Prescott. Although this last entry turns out not to be the deputy prime minister but his property consultant son, the overall message is clear: regeneration is big business now and everyone wants a piece of the action.

This is how Wilson spends much of his working week: trying to coax private sector investors such as contractor Laing O’Rourke, Dutch bank ING, property developer British Land and even American computer giant IBM – which is said to be “interested” in investing in the Thames Gateway – to part with their cash. “There is so much happening at the moment. The growth areas are starting to come on stream and the government is finally starting to do something to release Ministry of Defence and NHS land. Outside this there is so much inner city regeneration going on anyway that there is huge demand for private sector money.”

But Wilson stresses that there is a difference between setting up a regeneration project and having a solid investment opportunity to attract investors. He feels that regeneration schemes, whether large flagships or small inner city jobs, could do themselves a big favour by ramping up their sales pitch.

“There is a big debate going on just now about more opportunities to invest being created and whether or not people have the appetite to do this,” says Wilson. “We should be thinking of masterplans as prospectuses to attract the private sector. Private sector money is keen to get involved in inner city regeneration where there are high latent land values. In areas outside this, such as Cornwall, it is a different challenge. If you go to the North-east or North-west, apart from the obvious hotspots like Newcastle and Manchester, it requires hard work to try to establish value from the existing land.

These are niche markets and we need to be pretty proactive to realise any value – we need to think outside the box to find opportunities for private sector cash. The private sector does often get frustrated by local authorities and walks away – this needs to be avoided.”

The 38 New Deal for Communities organisations, established by the government to regenerate deprived areas through community-based partnerships, have also seen this as a problem and have recently set up a group to attract private funds and to provide potential investors with an obvious first port of call to find out what opportunities there may be with the NDCs.

Regeneration cheerleader

Wilson feels there is a role here for a chief cheerleader for regeneration schemes to entice investors, and thinks regeneration quango English Partnerships is the natural choice. He adds that the cheerleader could also help clear a path through the “minefield” of public sector agencies and quangos that all have to have their say. Local strategic partnerships, regional assemblies, regional housing boards, regional planning boards, regional development agencies all frequently get in each other’s way and confuse potential investors about who is doing what. An obvious solution, according to Wilson, is to “set up the sort of delivery bodies that the private sector understands – this will allow them to better communicate. It shows who are the interested parties and who is on-board with the project”.

Message 4

‘We have to be able to count the cost’

The government appears to be making the right noises to the private sector so far, but Chris Brown, managing director of regeneration fund Igloo, accuses Prescott’s people of making the job of attracting private cash much harder than it need be. “It has always astonished me that nobody has quantified what is needed to be able to get from where the government is now to where it wants to be. If this was done it would make the whole process of committing private sector funds much easier.”

EP has launched a regeneration index in partnership with fund manager Morley that will give a more accurate idea of the returns to be had in regeneration, but the ODPM admitted that it had no idea as to how much private sector funding was likely to be required in the longer term and had no plans to calculate a possible figure.

Message 5

The private sector often gets frustrated by local authorities and walks away

Pete Wilson, Tribal Urban Futures

‘Get things right and we’ll spend, spend, spend’

John Prescott and his officials should take heart from the fact that regeneration is now seen as somewhere that money can be made. As Andrew Hume, director in strategic consulting at property consultant Jones Lang LaSalle, points out, this was far from being the case even five years ago. “The approach of the institutional funders has begun to change and is now very much looking towards residential and regeneration schemes. The funds like to take a long-term view, and in some of the bigger regeneration schemes the timescales mesh. People are now being much less bullish on residential but this doesn’t tend to impact on long-term regeneration considerations as value increases tend to come over this longer period anyway.”

The fund that Chris Brown of Igloo looks after on behalf of institutional fund manager Morley is revealing: “Regeneration, not previously regarded as a place to invest, is now seen as one of the best. People like Paul McNamara at the Prudential looked at the research that had been done and said ‘okay, we were wrong on this one’.”

The research to which Brown refers was commissioned in the wake of the seminal 1999 report by the government’s urban taskforce, led by architect Lord Rogers, which, among other things, set a target of £1bn to be attracted from the private sector into urban regeneration by June 2002. Brown says that although this target was missed, it did stimulate thinking about how to convince more private sector players that investing in regeneration was a good deal.

The two pieces of research, one by research firm Investment Property Databank in March 2005, and the other by a team led by the University of Ulster in December 2003, provided much of the ammunition that Brown and others so desperately needed.

Happy returns for regeneration

The Ulster report, commissioned by the ODPM, found that regeneration schemes in eight cities between 1981 and 2001 gave on average 2.5% better returns than the UK average. The findings from IPD for English Partnerships confirmed the growth in returns from office, retail and industrial uses in urban regeneration as being broadly similar to the UK average at around 11%.

The Prudential and others were now convinced and as a result Brown has been able to put money where his mouth is. Igloo is in the throes of seeking new investors to take its total investment fund to £500m by 2008. The reaction has been good and Brown expects to increase the current £50m that he has invested in 12 regeneration projects around the UK to £300m by later this year.

Perhaps unsurprisingly Brown feels that it is only through funds like his that the government stands a chance of getting its hands on the sort of sums it needs from the private sector. “I’ve got doubts about the money needed for things like the Thames Gateway and the housing market renewal pathfinders. Without tapping properly into the institutional market, I just don’t see how they can be delivered.”

Tribal’s Pete Wilson offers a final thought: “The private sector needs to find ways of making a better return or it will go out of business. And the public sector needs private sector skills and capital to make things happen. But the government calls current partnerships ‘public private’. It should be the other way round.”

Who’s investing

“If I knew where all of this money was coming from I certainly wouldn’t say,” says one agent. His reticence is understandable, as one of the main goals of regeneration is to attract the attention of one of the institutional funds with their billions of pounds under management.

However, there are a number of names, some obvious some not, that are strongly rumoured to be interested in the 11-12% returns that regeneration schemes can bring, according to separate research by IPD and the University of Ulster. These include a number of banks which are primarily interested in area-based regeneration where property values across whole areas are going to be raised. Barclays, Royal Bank of Scotland, HSBC and Dutch bank ING all fall into this category.

Then there are the big institutional investors such as Hermes, Prudential, Legal and General and Morley; this last fund is already involved in the £100m Igloo fund. This is where the big money is going to come from and the government has to convince them to come on board in a big way if it is to deliver its promises.

It is most likely that these institutional investors will channel their cash through a couple of large specialist funds such as Igloo and the English Cities Fund that have built up regeneration expertise. Besides these traditional sources of funding there are a few others rumoured to be sniffing around such as developer British Land, contractor Laing O’Rourke and perhaps most surprisingly of all computer giant IBM in the Thames Gateway.