The Urban Renaissance - Who Pays For It?

There appears to be a gap between what we all desire from urban renaissance and what can be achieved. This gap is most strongly apparent in the availability of finance. The Seminar brought together two speakers from the 'demand' side, Dr Paul Evans of DETR and Joe Dwyer of Liverpool Vision, and two from the 'supply' side, Dr Paul McNamara from Prudential and Simon Blaxland from Goldman Sachs to highlight the issues.

Paul Evans, DETR
The market has not done very well in making our towns and cities better urban places to live. This is particularly, though not uniquely, manifest in the large conurbations. In order to address this, it is important to understand the shape and nature of the urban fabric. Conurbations are difficult to define but they are a significant driving force in the UK's economy.

The key current issue which has sparked the debate is the growing number of households society is forming, and thus the increasing demand for houses. It is seen as undesirable to provide these by further use of the countryside and the challenge is therefore not only to provide this housing within the existing urban fabric, on brownfield sites as encouraged by PPG 3, but to make the urban environment one in which people wish to live.

Reversing a trend of decades, cities are starting to take on once again a new role as vibrant centres for employment, leisure and culture. The same must happen for housing across the social scale. To bring this about much of the infrastructure, transport, health and education for example, requires renewal, as well as the more intangible elements which contribute to the quality of place. The Urban White Paper sets out a comprehensive framework for dealing with both the planning and economic issues. A clear vision is needed for all parties.

When looking at development and investment in the urban fabric, the public sector is currently spending a large amount and further expenditure plans have been announced. But this will not be sufficient and the question set by the Seminar, is how to get private investment involved. Why would they invest? What would they see as opportunities? What returns do they need?

Government, probably at regional level, needs to identify the opportunities. It is starting from a low base. It needs to get the right sort of people, from both public and private sector, with the attitudes, motivation and skills to make it happen - to combine the strategic thinking with action. The Government is investigating if new financial investment vehicles are required. There is also the question of whether tax breaks would help. Attention should also be given to the needs of small investors and developers and the roles they can play.

Joe Dwyer, Liverpool Vision
The definition of urban regeneration is simply the change of land from its previous use. It is usually market led by private developers who do the research and identify the opportunities. However, this tends to be done in an adhoc fashion and is a slow process. There is the need for planning guidance.

Liverpool is an interesting case study. It has an urban infrastructure which catered for 5m people 10 years ago, but only 1m people today. There is therefore enormous potential. But that cannot be reached piecemeal. Urban regeneration has to be done in a holistic fashion over extensive areas. That is why urban regeneration companies are necessary for these more complex situations such a Liverpool, East Manchester and Sheffield.

In terms of land and opportunities, Liverpool does it forcefully. It has produced a Master Plan and strategic framework with options. It carried out an engagement programme which required the involvement of various representatives of the different city communities. The Government and the City Council then adopted it. The implementation of the physical and social elements of the Master Plan can then be attempted from an agreed base.

The total cost is £1.5bn. Public investment is in the region of £400 - £500m with particular attention to transportation investment. It can be done within a ten year period which can be stretched to 15 years. There is no specific financing model and each geographical area is different with its unique combination of problems.

In Liverpool developers have, in the past, relied upon public subsidy, and this presumption will not disappear quickly. But there is the potential for super profits as property prices are very low by national average standards. In other areas, there will probably have to be a mix of public and private funding. Each area will have to create its own identity. Liverpool will build on the tourism industry and therefore needs to create the requisite facilities such as those for conferences and exhibitions.

Paul McNamara, Prudential
It is very easy to focus on the physical because it is so apparent. Urban regeneration is a remediation process: reviving the potential of the local economy by diminishing any locational disadvantages and improving transportation links; increasing the residential mix in forms desired by customers; developing new uses for those urban areas now abandoned or in terminal decline.

Financial institutions are not charities and need to be adequately rewarded for their involvement, for the risks they take. Their involvement need not be thought of just in terms of their conventional property involvement. It could also be bonds, venture capital or private equity. A professional investor looks at the structure of risk and return, and urban regeneration 'opportunities' needs to be presented in a form which meet the required investment parameters. The finance available is dependent upon the anticipated benefits that will be received judged against the current risk free rate (index linked gilts), plus a desired risk premium (discount price required today) and potential growth in benefits (maybe rental growth).

The tenants are likely to be unproven and depreciation can also be a high factor. This all contributes to a heightened perception of risk. To overcome this, more information is needed on the returns that have been achieved. £20bn of investment has been invested in the urban regeneration market, but there is no of information about the returns so far delivered.

Institutions want to see simplified planning. They would like to work with parcels of land with planning risk minimised. This would reduce costs and, combined with greater comparative information, it would lessen the perception of risk. Risk could also be reduced, and thus finance availability increased, if schemes could be implemented for public funds to provide limited underwriting. One such scheme might be a 'cap' and 'collar'. There would be a guaranteed minimum level of return, for example, gilts + 1% (the 'collar') and a 'cap' of, say, gilts + 5%. There is an infinite variety of such possibilities and many should be offered, perhaps in the same urban regeneration project, so that investors could pick and mix to achieve their individual investment goals.

The following recommendations should be implemented:

• Cut through the issues of uncertainty to guarantee a minimum level of return.
• Keep the approach simple in terms of products, the process and level of interaction with the agencies and the rewards.

Simon Blaxland, Goldman Sachs
Equity and debt markets might well see urban regeneration investment as an opportunity. In general terms, equity investors would be seeking high risk with commensurate high return over the short term. Debt markets, by contrast, look for low risk return over the long term.

For urban regeneration, there are the facilitators who are at the entrepreneurial level. Their key focus will be on the exit. Once they have delivered, how do they get their money? They will have concerns about the timing of the property cycle, with many examples of first investors not making the money. This approach makes it difficult for them to manage any long term infrastructure elements without government assistance, and also perhaps requires some support for exit strategies. Tax incentives are, however, not much help. Most equity providers look through the tax incentives to see what is behind them, and where and who are the final occupiers and investors.

Debt investment, by contrast, is all about cashflow and the risks attached to it. Again, tax breaks will be 'looked through', and the quality of either the ultimate revenue stream or guarantors being judged. The availability of alternate uses will also be relevant in deciding the level of security on offer.

There could be securitisation angles as there is a diversified institutional base for the full spectrum of the debt side.

At the end of the day, the issue is price. If the underlying risk free rate is rising, then there is a problem. The role of the Government is very important.

The UK Government faces an issue of how to get more money into property. Currently the risk premium attached to property generically seems to be too high. A broader market would reduce the premium, thus reducing the price, and broaden ownership in both the retail and the wholesale markets.

Subsequent debate.
The speakers generated a lively debate with the following points emerging, but not always receiving universal agreement:

• Land ownership, or at least control, was crucial. Achievable projects were hard to put together with multi-ownership. This led to doubts about the effectiveness of present CPO powers and compensation provisions.
• The private sector provision of major, early infrastructure will be hard to achieve. Government has the powers and the framework for delivery and must take the lead.
• There was certainly evidence that, if the right product were presented, finance would be achieved, even with competition from financiers.
• Many of the ultimate occupiers would not be of the type normally sought by financiers. They might be small businesses, perfectly capable of paying a rent, even an economic rent, but, anyway by repute, of a transitory nature. Or they may be individuals or families requiring state support to meet rent obligations. The differences needed to be intermediated.
• Property companies might, in principle, provide that intermediation. They also provided a vital element of local property information, well-equipped to identify opportunities. They were not, however, tax efficient intermediaries, nor particularly popular ones.
• Argument after argument ultimately reduced to 'profitability'. If a project could produce a profit, however reached, it should be financeable. If it could not, it would not be. Whilst undoubtedly true, it rather begged the question of the time needed to reach profit, this could be considerable in some urban work, and the risks of getting there.