Brownfield regeneration offers long term gains

Brownfield development opportunities in the UK were a long way from investors’ minds in mid-September. Global markets crashed and climbed in record proportions as billions of pounds were wiped off shares, only for investors to buy back in 24 hours later to secure substantial profits. On Thursday September 18 the FTSE 100 closed just short of 4850. By Friday it had jumped 431.3 points to 5311.3, an 8.84 percent increase – its biggest ever one-day rise as Britain’s leading shares added £103bn to their price.

Better trading could not disguise the fact the market remained way short of its 6732 peak in 2007, although the opportunities to make fast capital were evident. Not so in Britain’s struggling development sector. But could the long term offer a more promising prospect? Well, let’s not mince words. If the property market is in trouble, it’s even worse for the development land sector.

Brownfield value down

A report in August by Savills showed the value of brownfield sites down 19.8 percent- almost four times the rate of the housing market. The estate agent stated that its research showed residential development land values were falling at a sharper rate than the underlying residential market, ‘mirroring patterns seen in the late 1980s and early 1990s’. With brownfield development land a key part of developers’ asset bases, the valuations were more bad news for the struggling economy. And it looks to be getting worse.

Savills’ reported fall showed a drop of about seven percent in site prices for the first quarter of 2008, followed by a drop of up to 17 percent in the second quarter. All UK regions have registered falling values in 2008, with residential greenfield building land losing out most, at 22.5 percent. Despite the downturn, the industries biggest players continue to show resolve and look to be leading the way forward as smaller firms struggle.

Profits for Barratt

Barratt Development PLC – the UK based residential property builder and one of the UK largest brownfield developers – showed good profits in the first half of 2008. The Group established an unrivalled track record of consistent growth during the 1990s. Barratt acquired Wilson Bowden PLC in April 2007, and today has a network of 35 house building divisions throughout Britain, selling new homes under the Barratt, David Wilson and Ward Homes brands.

It reported in September that 71 percent of its developments were on brownfield sites (significantly exceeding the Government’s target of 60 percent) for the financial year ended 30 June, 2008. Completions for the full year were 18,588, an increase of 8.3 percent and Group revenue rose by 16.7 percent to £3,554.7m (2007: £3,046.1m). The average selling price increased on 2007 by 6.0 percent to £183,100, reflecting a change in product and geographical mix and benefiting from a number of high value sales in premium London locations. Although the underlying sale price decreased by approximately 5 percent (due to the change in product mix), Barratt’s achievement in the brownfield sector cannot be underestimated.

Fundamental problems

In a statement to the London Stock Exchange, Mark Clare, Group Chief Executive of Barratt Developments, expressed satisfaction, but warned more work was needed to address fundamental problems. He commented: “Whilst we have produced a satisfactory set of results in an extremely challenging market, there is little prospect for any material improvement in trading conditions until mortgage finance and customer confidence return. In the meantime, we have successfully refinanced our business. Our focus today and looking forward is to maximise sales revenues, reduce costs and generate cash to reduce debt.” Barratt’s brownfield development programme is impressive, but it is not alone in spearheading an ongoing regeneration renaissance that has spanned almost a decade and continues in these challenging times.

UK coal
Among the country’s largest projects today is the regeneration and redevelopment of Britain’s mines. Wakefield Council’s Planning Committee granted final permission to UK COAL in August to create almost 1,000 new homes, a business and commercial park at the 300-acre former Prince of Wales Colliery site, at Pontefract – the oldest mine site in Britain. The development is expected to create over 1,000 new jobs, restaurants and cafes, medical and educational facilities, a community centre, parkland and retail outlets.

Rotherham Council will soon decide whether to grant the company permission for 4,000 homes on the 700-acre former Orgreave-Waverley surface mine site between Rotherham and Sheffield.


A business park focusing on high tech industries is currently being developed, with other commercial centres possible. UK COAL is Britain’s biggest producer of coal and the owner of around 46,000 acres of land and other property. Its property arm, Harworth Estates, currently has plans to develop 76 sites covering a developable area of 3,680 acres, creating opportunities for building around 27,000 homes and 30m sq ft of business space over the next decade.

Ecotown
They include plans for a 5,000 home ‘ecotown’ on UK COAL’s 300-acre former Rossington Colliery site near Doncaster, which are currently being outlined to villagers in a series of exhibitions in the South Yorkshire mining village. A government decision on its proposed ecotown developments is expected in early 2009. If UK COAL’s brownfield plans are ambitious, they are collectively overshadowed by Europe’s largest project.

The plan to build a £1.5bn super port and business park on an oil refinery on the banks of the River Thames, in Essex, was granted Government consent in 2007 after receiving backing from Thurrock District Council. Contrary to many people’s expectations, Dubai Ports (DP) World has forged ahead with the development, already awarding millions of pounds worth of business to both local and international firms.

Superport at Thurrock
In August, 2008, signatures were put to the first major contracts, a joint venture with Laing O’Rourke and Dredging International, which will see DP World build the UK’s first deep-water port in more than 20 years.
The 1,500-acre brownfield site development is expected to secure 12,000 jobs.

Optimism surrounding these major projects remains in stark contrast to the smaller companies who are suffering most from downturn.  Empty building sites and vacant plots in some of the country’s most deprived areas say more about the problem than any government report.

An additional factor remains ‘unhelpful’ legislation that fails to accommodate completions and threatens to push even more of the mid range players out of the struggling market.

Community Infrastructure Levy heads through Parliament
Although the Government shelved its proposals to implement a Planning-gain Supplement, the Community Infrastructure Levy (CIL) could yet pose more problems for large and small scale brownfield developers. The Levy’s provisions, which are currently going through Parliament, will be a new charge that local authorities in England and Wales will be empowered, but not required, to seek on most types of new development in their area. CIL charges will be based on simple formulae which relate the size of the charge to the size and character of the development paying it. The proceeds of the levy will be spent on local and sub-regional infrastructure to support the development of the area.

CBI

The CBI describes the levy as ‘less harmful and more workable’ than proposed Planning-gain Supplement, but remains cautious. A more serious problem to regeneration progress is the burdensome tax imposed on empty commercial buildings.
Vacant offices and shops no longer receive rate relief of 50 percent. Industrial units previously gained full relief, but now all unused commercial property must pay full business rates after a three-month period of grace for commercial premises and six months for industrial property and warehouses.

The change, which came into force on April 1, means site owners without tenants are either refusing to complete projects or are demolishing existing builds to avoid tax payments. Amid widespread outrage that too little is being done by legislators to accommodate the construction sector, the CBI has announced it will be enhancing the role it undertakes on behalf of the industry.

Construction Council

Following discussions with the major construction companies, it has agreed to set up a Construction Council chaired by John McDonough, chief executive of Carillion plc and vice chairman of the CBI’s Public Services Strategy Board. The Council, which will represent contractors, house builders, civil engineers, component and product manufacturers, designers and support services, was due to begin work in the autumn.


The Government regeneration agency, English Partnerships, remains bullish about development opportunities, but has plenty to lose if the downturn continues to deepen.
The agency is involved in more than 1,300 regeneration projects nationwide and has a portfolio of strategic sites comprising some 6,000 hectares of land. Its  HYPERLINK “http://www.englishpartnerships.co.uk/brownfieldstrategy.htm” \t “_self” National Brownfield Strategy aims to unlock and turn around some of the country’s most unattractive sites for development, tackling contamination and economic blight.

IPD Regeneration Index

The agency issued a statement in August 2008 describing regeneration properties as a ‘solid option for investors’, although not in the short term.  Referring to the IPD Regeneration Index – based on a £8,134m sample of 659 properties – it highlighted The Regeneration All Property total returns fell to -6.0 percent in 2007, compared with the broader UK All Property Index which slid -3.4 percent over the same 12-month period. But there was some good news for investors and developers. For the first time the index looked at development performance in regeneration areas. Developments in regeneration areas returned 1.2 percent in 2007, significantly outperforming the IPD UK All Property Index.

Savills

Yolande Barnes, Research Director at Savills and one of the report’s authors, said: “The case for investment in regeneration assets is more compelling if residential property and development activity are included. In fact, the more exciting returns and possibly the more stable income streams have been enjoyed by those willing to diversify away from standard, ‘big box’ commercial standing property investments and towards residential ‘small box’, ‘neighbourhood commercial’ type properties and development activity.”


Offices managed to retain their attraction in relative terms, returning -0.9 percent in regeneration areas compared to -0.5 percent in the broader UK index. Total returns for office property in regeneration areas consistently exceeded the IPD UK average over the last five and 10 years. Historically, industrial properties in regeneration areas have consistently offered investors strong returns and come with a lower degree of risk. 
However in 2007 industrial properties in regeneration areas slightly underperformed, earning investors -4.4% compared with a -3.5% UK average.

English Partnerships

Steve Carr, Director of Policy and Economics at English Partnerships, confirmed there were difficulties, but insisted investors needed to look ahead. “In this difficult market, it will pay to look carefully at property investment opportunities in regeneration areas,” he said. “The Index clearly shows regeneration properties will eventually outperform when the cycle eventually moves upward. The long term prognosis for regeneration property remains good.”

If Mr Carr’s optimism is to be expected, he is by no means alone in his positive outlook. There remains too a chance Government may decide to lift the tax on empty commercial properties tax in an attempt to help industry drive the economy back to health. Investment opportunities are likely to remain plausible across the brownfield development sector irrespective, as winners and losers emerge in the same way they did on that fateful week in September when Wall Street went into temporary melt down. 
High rollers out for a quick return will continue to look to the City, the stock markets and the international finance sectors. Sounder investments and even bargains may lie closer to home, in the longer term.