Perfect harmony

How do developers and public sector professionals’ best work together? Public sector planners and other council officers are, at times, suspicious about developers’ motives. While developers are sometimes unable to understand what direction the public sector is coming from. The result: no meeting of minds and much frustration on both sides.

So what does the public sector typically want from new property development in their area? New property is seen as ticking several boxes; the more are ticked, the greater the interest:
- Providing new space that can be filled with jobs
- Replacing old eyesores with modern buildings and delivering statement buildings that improve an area’s image
- Generate value that can be siphoned off and made to provide other uses that may have absolutely nothing to do with the development
- Contribute to a future increase of the local tax base
- Meeting the public sector’s own property needs.

So what do developers want? It’s fairly simple – to make a profit. That means maximising the value of any sites or buildings relative to the costs of development. This does not always mean crinkly sheds and lego-like office buildings. The best developers realise that they can build a brand by the quality or individuality of their development, this may not mean maximising the profit on each site in turn.

The past and the pending
When looked at from the perspective of the public sector; regeneration, planning and property has gone through several well defined cycles. These include:
- The late 1980s Thatcher boom: Growth in commercial property, especially offices, was led in many areas by development incentives such as Enterprise Zones, the Urban Development Corporations and rising property values.

There was very limited direct support for property development. In retrospect, there was relatively little attention to the quality of design in most areas. We also re-discovered our water edges with Docklands architecture. Salford Quays and Canary Wharf are two examples of the vernacular of the era.

- The New Labour boom: There was a much stronger role for the public sector in shaping, investing and influencing development. There were grand plans and every town and city had to have a masterplan. There was touching faith in the idea that good design could revitalise derelict areas and their economies. As the economy boomed and value rose, private property development was seen as an endless source of funding for regeneration, with developers having bottomless pockets to pay for infrastructure and community programmes. The developer/public sector interface improved as a result of the creation of Urban Regeneration Companies and other such bodies that could speak the language of public and private sector.  On the back of a credit-fuelled boom, we rediscovered town and city centres and populated them with apartments and offices.

- The current property recession: The party was over. But the public sector has struggled to appreciate that there is simply no longer the development values or uplifts on planning to pay for complex regeneration. At the start of the recession, the public sector moved swiftly from extractor of value to provider of subsidy.  Suddenly developers became attracted to grants to make development stack up. Support like Kickstart and gap funding became vital tools to help development happen. But since the summer of 2010 the game has shifted again.

Standing ground
Currently, it’s hugely trying for everyone involved in the industry. The public sector has practically no money to support property development and is increasingly desperate to find ways of generating value from developers. Private developers are emerging from a bruising three years but, unless they are cash rich, usually struggle to get development finance. Commercial values are low compared to previous peaks, but have recovered in some markets, especially London, from the trough of 2008. However, the development economics of property schemes on difficult sites in tough locations simply do not stack up.

Meanwhile the capacity to work with developers is disappearing in the public sector. Useful arms-length regeneration vehicles have been or are being wound up; the numbers of local authority regeneration officers are being slashed at an alarming rate.

New world rising
Developers and their advisors need to understand the ‘alphabet soup’ that is public finance for development funding: RGF, ERDF and TIF to name a few:

- European Regional Development Fund (ERDF): In principle, is a useful form of funding. But it can also be an acronym that strikes terror into those associated with it. The guide to what investment is, and is not eligible for ERDF runs to several hundred pages. In brief it will not support any form of retail or housing development and treats profit in a very peculiar way. Beware of the dreaded Article 55 – a Kafkaesque arrangement that requires any profit over and above what is assumed in the subsidy/gap funding calculation to be paid back in full to the EU – so 100 percent overage and 0 percent upside for the potential developer.

However, especially in the north of England, there is still headroom to gap fund property. Indeed, with the loss of Regional Development Agency funding, programme managers are desperate to seek private sector investment.

Welcome to the increasingly bizarre world of European Funding.

- Regional Growth Fund (RGF):  Imagine a world where around 15 pots of government money to support growth and regeneration are abolished and replaced by one pot that is probably only 10 percent to 20 percent of the size of previous funding. Further imagine a new pot of money into which practically any part of private of public/private investment can table a bid in England if it shows some link to job creation. There you have the Regional Growth Fund.

- A total of £1.4bn is available for three years from March 2011. The focus of RGF is on the creation of “sustainable private sector jobs”, in areas that face particular challenges from the public sector cuts. Property development projects are eligible; they have the advantage of being entirely place specific and so can link to areas of need. However, they only support job creation indirectly as they clearly rely on business eventually occupying the property. In bidding for RGF, developers are therefore competing with projects that usually directly support job creation. Property development projects need robust methods of identifying, with some degree of certainty, that future private sector direct employment that will be created. This means having pre-lets, occupier agreements, etc.

- Tax Increment Financing (TIF): An idea imported from the USA, taking almost three years to fully implement.

However, the Local Growth White Paper did signal a determination to move it forward. In essence it requires the Treasury to agree to certain local tax (the non-domestic rate revenues arising from an increase in the local tax base) to be retained by local authorities. If they can do this and be certain of the extra revenue from future development, they can then use Prudential Borrowing powers to raise finance for upfront infrastructure to pay for future development. In principle everybody is happy, but the government needs to fire the starting pistol.

Conclusions
There are still funding opportunities to unlock this era of difficult development. But the capacity of the public sector to interface with the development community is nose-diving. Therefore, it will be increasingly up to developers to make the running and aid the public sector to help them make it happen.