The R word is back

You can’t accuse the prime minister of lacking ambition. Launching a drive in January to tackle physical decay in the UK’s 100 most run-down housing estates, David Cameron said the £140m plan was part of a “comprehensive package of measures to end poverty”. However fanciful that notion, his pledge to start tearing down “so-called sink estates” - or, as he put it, “simply […] knocking them down and starting again” - has already proved hugely controversial. Eileen Short, chair of lobby group Defend Council Housing, says it provoked “real anger” among existing estate residents: “Even if he was just playing to his supporters, how dare he go around putting the fear of God into tens of thousands of people about the future of their homes and communities? It’s entirely cynical and dishonest.”

This response demonstrates immediately the huge problems inherent in this type of redevelopment, where winning local hearts and minds is as big a part of the undertaking as laying the bricks and mortar. And yet last week the government pushed ahead with its plan, calling for expressions of interest from promoters of estate regeneration in securing help from a Lord Heseltine-led taskforce set up to drive this initiative. All this follows on from a line in the Autumn Statement that the government would offer £2.3bn in loans to “help regenerate large council estates and invest in infrastructure needed for major housing developments”. Understandably, therefore, this drive, supported by the likes of Berkeley Group chairman Tony Pidgley, has got parts of the development industry very interested indeed.

It comes as part of a wider ambition to boost housebuilding and home ownership through Starter Homes, planning reform and direct commissioning of housing, supported again from the very top of government (see boxes below). But it also comes five years after the coalition government cut nearly all funding for regeneration, and essentially removed the “r” word - such a big feature of the New Labour years - from the lexicon of government. For those in the sector, simply hearing Cameron mention the word has been a huge boost. But with £140m the only confirmed funding, and no details yet from the government on how communities or developers might access it, there remain huge questions over whether the renewed government ambition will actually help get these trickiest of schemes off the ground. And whether the policy will have anywhere near enough credibility to make a difference, given the likely strength of local opposition.

Regeneration dividend

One housebuilder that is very positive about all this is Countryside, which has made its estate regeneration business central to its initial public offering sales pitch to potential investors ahead of its imminent flotation. Chief executive Ian Sutcliffe told Building in January that “the thing that really marks Countryside out is the partnerships business,” which carries out estate redevelopment projects and which he said would soon make up more than half of the firm’s revenue. “The timing of David Cameron’s announcement couldn’t have been better. We’ve got a fantastic pipeline of work and the rate of opportunity is growing enormously,” he said. Countryside lists a 400-home scheme in Walthamstow, and the 500-home South Oxhey regeneration in Hertfordshire among those it will shortly start work on. Berkeley Group is another firm to have made estate redevelopment a big part of its business, with two schemes in London, at Kidbrooke in Greenwich and Woodberry Down in Hackney, representing an enormous long-term financial commitment.

Estate redevelopment is actually devilishly difficult to pull off successfully. The basic model, within higher value areas at least, is to fund the redevelopment through densification. This works because the additional homes can be sold on the private market, and that profit used to subsidise the costs in the rest of the scheme. Many, such as Yolande Barnes at Savills, author of the agency’s Complete Streets report into redevelopment of London social housing estates, argue the densification is acceptable in already built-up areas because many post-war estates were actually built at low, almost suburban densities, in which high-rise blocks were surrounded by acres of
open space.

Even if he was just playing to his supporters, how dare he go around putting the fear of god into tens of thousands of people about the future of their homes?

Eileen Short, Defend Council Housing

However, the difficulties getting this to stack up are legion, even if you can avoid the inevitable mixed feelings of existing residents fomenting into a big political issue at the local council. Simply securing control of the site often incurs huge costs due to the number of Right to Buy leaseholders who have to be compensated, with compensation also needed for disturbance during construction. Space has to be found in which to decant tenants before their homes can be knocked down. On top of that, supporting infrastructure has to be paid for, remediation of the site, and the new affordable housing, with these costs needing to be met before significant revenues from sales begin to roll in. Richard Jones, partner at consultant Arcadis, says: “There are big issues in working these schemes, but that’s why the likes of Countryside and Crest will get excited about it, as they think they’re the experts in working through these problems.”

It’s worth it because there is ultimately a big prize for developers to be had: what is known as the regeneration premium. If estate regeneration is done well, then the improvement in the reputation of an area caused by a successful redevelopment can generate increases in the price of homes far beyond those seen in the local market generally. “It’s strange more housebuilders haven’t got involved because the one thing estate regeneration gives you is the opportunity to drive value in a way nothing else can touch,” says Arcadis’ Jones. “You can outrun the market with a regeneration premium.”

Generating this premium relies on placemaking skills which of course require great care over the design. However, a report produced by CBRE for the RICS and published last week, said the sales premium for estates with good placemaking varied between 5-50% above the local market. In addition, Savills’ Complete Streets report found that new places designed around streets - which it says is what residents and prospective buyers want - were about 10% cheaper to build than more common “blocked” developments.

Now, lining up alongside these benefits, is the prospect of central government support and funding. Whitehall insiders accept the £140m promised thus far won’t radically change the viability of many schemes, but they say Lord Heseltine’s estate regeneration task force stands ready to de-risk schemes with help on often thorny issues such as planning and compulsory purchase. Cameron held a summit of potential investors in regeneration schemes, understood to have included institutions such as Legal & General, M&G and Hermes, when the
initiative was launched. One source close to the government’s thinking says: “The investors all said they’d be willing to step in with funding if the government was able to de-risk the projects; they would become quite attractive to investors.”

Obstacles

Nevertheless, many in the market remain sceptical because there remain a huge number of obstacles. The most obvious is funding. Chancellor George Osborne’s 2010 cuts removed in excess of £500m annually that was being spent on housing regeneration and redevelopment, with schemes such as Housing Market Renewal, the New Deal for Communities, Kick-start and others all falling by the wayside. Projects were halted half built. The coalition also more than halved the grant available to fund all social housing, with the introduction of the affordable rent product, something that is likely to be cut further with the introduction of Starter Homes. In place of this, the government is so far offering just £140m, spread over six years and 100 different schemes. A spokesperson for the communities department confirmed to Building that, of the £2.3bn mentioned in the Autumn Statement for “estate regeneration” and “major housing developments”, only £290m was actually going to estate regeneration, and £150m of that had already been spent - thereby leaving only the £140m launched by Cameron. David Pipe, policy and practice officer at the Chartered Institute of Housing (CIH), says: “Given the scale of what they’re hoping to achieve, £140m doesn’t stretch very far,” while Jones calls it “totally inadequate”.

This reliance on the 100 schemes essentially funding themselves immediately suggests it will be very difficult to get projects off the ground outside of the south-east of England or other house price hot-spots - because money made on the homes for sale will not be enough to offset scheme costs. Michael Hill, new business director at Countryside’s partnerships business, says: “Once you move out of the high value parts of London, then even if the local authority is prepared to subsidise the scheme, the money you can generate might not be enough to make it work.” So David Cameron’s “100 worst estates” may in reality not be able to be helped if they are
situated in Burnley, Stoke or low demand parts of the North. “Inevitably you’re looking for pockets of deprivation in otherwise prosperous areas,” says Barnes, “not parts of the country where new build housing is a marginal activity.”

Councils want to know if new homes will be protected from forced sales from rent to buy, otherwise, why would they invest in them?

David Pipe, Chartered Institute of Housing

Despite the cuts of the last parliament, some estate regeneration schemes have nevertheless progressed, largely on the basis of the rise in house prices seen in the last three years. In addition, coalition reforms that have allowed local authorities to keep hold of the rental income they generate from homes rather than pass the money to government have also given some councils the confidence to subsidise big projects on the basis of a predictable future income. But this step forward is in danger of being undercut by the extension of the Right to Buy to housing associations, which is being funded by forcing councils to sell off their most expensive homes for rent. Councils, therefore, may be unwilling to fund the construction of new council homes which they may then be forced to sell. “Councils want to know if new homes will be protected from forced sales under the Right to Buy, otherwise, why would they invest in them?” says the CIH’s Pipe.

Worse still, the extension of Right to Buy will extend to housing association estates the problem of compensating Right to Buy leaseholders on estates scheduled for demolition. This is already a huge drain on the financial viability of local authority schemes. Jim Martin, senior partner at consultant Martin Arnold, says he is working on one scheme in London with 100 leaseholders. “You’re looking at spending tens of millions of pounds just to get control of the estate before you’ve even begun to do anything,” he says.

In addition, Savills’ Barnes says volume housebuilders, in the main, lack the necessary place-making skills, leading to “blocked” developments rather than streets. “It’s an international model of construction that has worked in the booming markets of Asia and has been imported into Britain, but it’s limited. A lot of architects don’t know how to design housing.”

But despite all the financial challenges, the highest barrier in getting the schemes to work is likely to be local opposition - which DCH’s Short says has been fired up by Cameron’s rhetoric about “sink estates”. Pipe says: “The language Cameron is using immediately prompts the negative response from some.” The initiative comes as the government is already defending political accusations it is attempting to end the provision of rented social housing with the roll out of Starter Homes and moves to end secure tenancies. “The fact that it’s this party [the Conservatives] talking about estate regeneration will instantly create distrust in many communities,” says Barnes, who says a political consensus is required to get over this hurdle. DCH’s Short says: “When they start talking about this working in areas of high value you start understanding what this is all about - they want to make a bit of money. It may be good for the landlords and speculators, but not for the people who live in these places.”

Lord Heseltine, at least, does not seem to be repeating Cameron’s mistake and, when talking about the initiative in January, went to great lengths to make clear the Estate Regeneration taskforce would only support schemes with community backing, where individuals are compensated for any costs, and where tenancy rights were “fully protected”. “We will help [local people] but we will not compel them to do what they do not want. We do not and cannot know the nature of the plans that will be proposed,” he said.

Unfortunately for the construction industry, this democratic approach, reflected in the statement on Estate Regeneration published last week, means very little - if any - guidance is being offered as to what schemes the government will support and how. Countryside’s Hill says: “The government needs to give greater clarity to why a local authority would want to promote a scheme through this panel rather than just push ahead on their own. There is no apparent additional benefit here.”

All of this together suggests that while Cameron’s rhetoric might have worried those council tenants anxious to stay in their own homes, for the private sector at least there is little sense that a regeneration building boom is round the corner.