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Developers: embrace local authorities — and their land banks

 

Dealing with local authorities was never and will never be the sexy, adrenaline-fuelled type of business that attracts entrepreneurs to development but, ironically, it is here that I find hope. This will be the backbone of any future chance for sustainable development in the next few years.
 
No retail development in the country is viable today without some form of subsidised land pricing. I have previously said — and wait anxiously to be proven wrong — that a retail scheme with a zone A rental value of £110, a forecast construction cost of £100/sq ft and a sale yield that starts at 6.5%-6.75% will generate a loss, unless the land value is negligible. Few private or corporate landowners would write off their land value, so most development sites are going nowhere in the near future.
 
The only way to approach city centre regeneration on any level is to turn to the entity that has the most to lose from the prolonged delay of a stalled development and the most to win with its eventual completion: the local authority.
 
Although funding is expensive and selective, it is not in scarce supply for development. If returns sufficiently reflect the increased risk that is required to be taken on since 2008, so that the funder can share in the development profit, streetwise and sophisticated funders alike are there to do business.
Zero sum
 
The issue, albeit seemingly obvious, is site value. Zero is a good start and anything less than that is a bonus.
 
Through local authorities, central government — like no other landowner — can take a long-term view and benefit from added value, additional employment and indirect revenue generated by development. This is a realistic solution that enables councils to finance the acquisition of stalled schemes and to justify this action on the basis of long-term regenerative and economic benefits that will far outweigh the cost of waiting for land values to rise again.
 
One example of a forward-thinking approach is in Newport, south Wales. In 2008, when the then preferred developer of Friars Walk went into administration, Newport City Council stepped in and bought the land needed for the scheme before the compulsory purchase orders expired. It took this decision knowing that it did not possess the skill set to complete the project. So the council sought a development partner to bring practical experience to the table.
 
It was agreed that the council and the developer would provide joint finance for pre-development costs. This simultaneously aligned the parties’ interests and gave the council a level of control over the subsequent stages of design and development. Newport Council is blessed with competent officers and members with a positive mentality, cross-party support and an awareness of the regenerative effect of helping the project. So progress has been rapid, and planning consent, key prelets and construction pricing have all been addressed.
 
We will start equity funding and construction finance talks on Newport later this month. The council and Queensberry have modelled the investment on the basis of generating the correct risk/return profile for investors, given its current status. Land value — or ground rent — to the council will be determined as a priority return only after specific hurdle rates have been achieved. If funding is in place by the end of this year, we will be on track to complete construction in 2015.
 
This route gives no clear certainty on ultimate site value but a range of outputs. However, it places the project competitively into the investment market today, which, in turn, allows investors to consider creative funding solutions and gives the scheme every possible opportunity of being completed within a tangible timeframe. This then puts Newport’s wider investment programme well on course, ahead of other councils that are still pondering the pros and cons of starting their own schemes.
 
Development is no longer about bidding highest site value with an institutional funding partner, but joint venturing the pre-development phase with local authority landowners. It’s also about creating future value and aiding development with creative financial structures that require upfront public sector investment to deliver long-term regenerative income earners. It is about identifying risks and being prepared to take them on.