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How to speed up regeneration projects during the downturn
Contract Journal; 25 November 2008

A new way of using surplus public sector land and buildings could be the key to keeping regeneration work flowing for contractors during the economic downturn. Mark Smulian explains

Projects in inner city and former industrial areas that depended on developers' ability to turn a profit have looked distinctly suspect since the economy's woes took hold.

But the new approach to regeneration, known as asset-backed vehicles (ABVs), can still work because they exploit the public sector's ability to support development without needing a rapid financial return.

Essentially, an asset-backed vehicle is a partnership between a public body and a developer in which the former contributes land and the latter money and expertise.

Since the public sector partner already owns the land, there is no need for a developer to find the money up front to buy it and so, the theory goes, construction work can get started even in hard times with the partners taking their return at some future point.

Having a set of nearby sites also creates a critical mass of developments there will be a pipeline of construction work for several years ahead in the area concerned and the council will have a financial interest both in being co-operative about planning and in spending to make sure the surroundings look attractive to investors.

A council will, for example, spend money on roads and transport to make sure new buildings are not stranded amid wastelands.

Long-term partnering

Someone has to build it all. While the partnerships can employ any contractor they choose there is an obvious advantage in having a small number of builders engaged to exploit the advantages of long-term partnering.

George Grace, a planner at property firm King Sturge, who works on asset-backed vehicles, explains: "Our view is that this is an approach that allows regeneration to keep going in the current climate.

"There are a lot of projects that were viable a year ago, but no longer are because the return to developers has fallen 15% to 20%, and this is a way of cutting the risk.

"The construction costs can be brought down through economies of scale and there will be large long- term developments that allow for cheaper financing." Grace says asset-backed vehicles are usually structured so that several 'quick win' sites come first and then "so long as the developer has performed well, they have options on the rest of it and they do not have to put all the money in on day one".

He adds: "I expect people to become far more open to ABVs as a catalyst for regeneration in this climate." Paul Spencer, a director at Jones Lang LaSalle, another property firm active in this field, says asset-backed vehicles' crucial advantage is that the council has an interest in developments success, because ultimately it can derive an income from its share of profits.

He says: "Government wants better use of public assets and many cities have large areas of land that can be regenerated if the private sector puts in its expertise, so this keeps regeneration going during this turmoil."

One such project about to get off the ground is the Newcastle Gateshead City Development Company. It has appointed the former Lord Chancellor Lord Falconer as chair and Jim McIntyre, former managing director of Gladedale Capital, as chief executive.

A report to both councils says the CDC's main job is to improve the economies of Newcastle and Gateshead, which it identified as being hampered by a private sector that is too small, and to give the two towns the critical mass needed to attract investors that they individually lack.

John Rundle, lead officer on its implementation team says: "We are working on an early phasing programme to identify sites that are deliverable and looking at the urban core in both areas through an economic masterplan due out this spring, which will show where the opportunities are and what it looks like on the ground.

"There is a mix of sites; there are big iconic developments like Baltic Mill in Gateshead, but also brownfield sites nearby, and the same pattern is there in Newcastle such as the area east of Pilgrim Street and the Discovery Quarter." In the changed economic climate the company will have to take "tough decisions about which sites will work at the moment", Rundle says. "When we_ve talked to the private sector it has been generally enthusiastic about the concept of having two local authorities on board for development, but they have said they want the planning systems to work smoothly."

Core zones

Both councils are considering a planning policy that would cover the core development zones separately from the surrounding area, he says. Mr Rundle says the CDC board has not yet decided on the use of local contractors or suppliers, but notes "both councils have been keen on that in the past".

Croydon Council is on the brink of signing a 450m deal with John Laing Projects for a 50/50 regeneration partnership that will redevelop a number of council-owned sites in the borough's centre.

The council says it expects to gain a far higher long-term return than by simply selling the sites to Laing, while the company gets a steady stream of development opportunities for years ahead.

The deal is likely to start with two 1960s office blocks now at the end of their useful lives, sites currently used as large car parks and other buildings in central Croydon, to which other sites may be added later.

Asset-backed vehicles drive through rail work

Network Rail has formed an asset-backed vehicle with Kier Property to redevelop six stations and their surroundings.

They will work as equal partners to improve stations at Enfield Town, Epsom, Guildford, Maidstone East, Twickenham, Wembley and Walthamstow and adjacent brownfield sites, with a development value of more than 500m.

Mick Martin, Network Rail's director, commercial property, says that working in a 50/50 partnership the company will get its stations improved while the surrounding developments will create "a sustainable income stream to improve the railway for years to come".

The company says the partnership simplifies the development process and so cuts costs. The sites, all in important commercial areas and by definition well served by public transport, are expected to be viable developments even in the current climate.