The £ Factor

“There is a real contest at the moment and it is not clear who is going to win it,” says Keith Brooks, head of regeneration at consultant EC Harris. The contest he is referring to is that between regeneration players doing their damnedest to impress the financiers in the City. “The door is very much open – the challenge for the regeneration sector is how to innovate to show the City that their particular project is where their money should be.” This is a cut-throat competition that no one can afford to lose.

The key to winning the money men’s vote, according to Ken Dytor, managing director of consultancy Regeneration Investments, is to first understand where the multitude of banks, fund managers and other investors are coming from. “Everywhere I go I’m seeing people who want to invest in regeneration – it has a much higher profile now,” he says. “The traditional property ‘vanilla’ investments are not generally providing such good returns just now and there is a huge wall of money out there looking for a home in regeneration.”

Andrew Ludiman, director at property consultant King Sturge, agrees: “We speak to developers and funders all the time on a lot of public sector projects that are coming up. They are very interested to get involved here – especially in joint venture vehicles. This ranges from FTSE100 companies such as British Land to smaller regional niche players; then there are the institutions such as the Prudential with Berkeley Homes; and Axa has a regeneration allocation to invest as well.”

This chimes with Dytor’s experience, although Dytor adds that the interest being shown at the moment has come less by design and more as a result of investors being introduced to regeneration by successful cash flows from health and education public/private partnerships and PFI. “Most players will say they are interested in investing in cash flows that come E E from infrastructure components,” he says. As an example, he cites the private Capio Hospitals chain that was sold to private equity houses Apax and Nordic Capital for £1.16bn last year. “People are seeing that this healthcare stream can be built on in regeneration areas as this is where the growth in population will be. Education and even nursing homes are the same. People are also increasingly aware of operating companies and property companies – this is now accepted language in the City.”

So what – to use a more common language among financiers – is regeneration’s bottom line? A look at the latest research from the Investment Property Databank and property agent Savills of a portfolio of 750 properties worth £5.4bn in regeneration areas across England and Wales shows that, in the past decade, returns from regeneration investments have mirrored those from the wider property market with 12.2% and 12.8% respectively [see graph above]. However, when you look over the last three and even five year periods, regeneration investments have actually outperformed those in other areas. So far so sensible, although as Brooks points out, regeneration projects are notoriously hard work from an investor’s point of view because of the lengthy timescales involved and the plethora of business models employed.

This is definitely a concern for Nick Salisbury, head of structured finance at Barclays Bank which has over £200m invested in regeneration projects. Like his rival HBOS – which has recently grabbed the headlines for its £715m purchase of housebuilder Crest Nicholson – Salisbury says he is much more comfortable investing in joint ventures such as public/private partnerships as they are “familiar with this longer term investment model through PFI”. As an example of this he cites Barclays’ experience of forming part of the consortium that won last summer’s bid to run project MoDEL – a £150m deal to develop six surplus armed forces sites in London. “There are now a lot more investment opportunities being offered to us. But we are perhaps seeing a bit too much re-inventing of the wheel. Take project MoDEL – both the MoD and private sector partner are very pleased with how this is structured. Why not roll out this vehicle elsewhere in regeneration?”

There is a huge wall of money out there looking for a home in regeneration

Ken Dytor, Regeneration Investments

This is a message that will be listened to keenly by the chair of English Partnerships Margaret Ford as she sets out the priorities for the public regeneration agency’s replacement body Communities England. “I think that the way the City views and values regeneration is going to be extremely important to us,” she says. “Particularly the relationships with institutional investors. I have also had a number of conversations with private equity bodies – this has surprised me as I thought this would not be an area that would have been of so much interest to them.”

The key thing for Ford is the investment offering E E made by the public sector: “The challenge for Communities England is to become a far better client for financiers. Also to help the industry at large – we have to understand where the investment appetite is. I don’t want to waste people’s time – I want to work out what products people want to invest in and help them make it as easy as possible. I don’t want there to be loads of regulatory hoops for them to jump through.”

This will be good news to Salisbury who adds that there is another growing reason for Barclays’ interest. “We are in it for a good commercial return, but we also see it as a good thing from the point of view of our corporate social responsibility agenda.” As a result Salisbury has invested in the Bridges Fund – which invests to provide jobs in the 20% poorest electoral wards – as well as the £150m Igloo Fund which was set up in 2002 and is run by Morley Fund Management.

Neil Gardiner, a fund manager at Morley, identifies another reason for the popularity of regeneration in the City: “There has been a resurgence of investment in the last year or so [in Igloo]. This is due to the noise that has been made by the press and politicians about carbon emissions and environmental awareness. There are not too many opportunities for people to easily invest in areas that reflect this, but Igloo does. People find it good for them to be investing in a fund that is so environmentally focused.”

Gardiner’s colleague, Hoong Wei Woon, adds that regeneration can now “comfortably be defined as an investment area” and that it will not be long before Igloo is no longer the only fund with a specific regeneration focus through its investments such as Isis – a company set up to develop surplus land from British Waterways. Indeed fund manager Hermes has already made its first foray by backing developer Argent in the huge project at King’s Cross in central London. “Investment houses, pension funds and banks all have mandates to invest in property,” says Woon. “We are outperforming the IPD’s universal rates of return by 20% – this is very attractive to people. I am sure that some other funds will set up in the next few years. We’d be pleased if they did as we can’t fund all of the regeneration that is out there!”