Written evidence submitted by the British
Property Federation
INTRODUCTION
1. This submission by the British Property Federation
has been prepared in response to a request by the Communities
and Local Government Select Committee for views on the effectiveness
of the Government's policies on regeneration.
2. The British Property Federation (BPF) is the
voice of property in the UK, representing companies owning, managing
and investing in property. This includes a broad range of businesses—commercial
property owners, financial institutions and pension funds, corporate
landlords, local private landlords—as well as all those
professions that support the industry.
3. The Select Committee has indicated that it
is particularly keen to receive views on the following points:
— How
effective is the Government's approach to regeneration likely
to be? What benefits is the new approach likely to bring?
— In
particular: will it ensure that the progress made by past regeneration
projects is not lost and can, where appropriate, be built on?
Will it ensure that sufficient public funds are made available
for future major town and city regeneration projects as well as
for more localised projects?
— What
lessons should be learnt from past and existing regeneration projects
to apply to the Government's new approach?
— What
action should the Government be taking to attract money from (a)
public and (b) private sources into regeneration schemes?
— How
should the success of the Government's approach be assessed in
future?
THE CURRENT
POSITION
4. A lot of progress has been made in recent
years in reviving some of our cities although huge challenges
remain. The regeneration model during those years has depended
on the injection of very large amounts of public money, much of
which was not spent as effectively as it could and should have
been. It was also driven by:
— readily
available development finance from banks and others, underpinned
by rapidly increasing if unsustainable property values;
— good
returns from high density housing developments, supported by rising
prices and readily available mortgage finance;
— development
returns of a scale that allowed development in poorer areas as
well as ample contributions from developers to both physical and
social infrastructure; and
— the
availability of both public and private finance for infrastructure.
5. Current economic circumstances mean that the
regeneration template of the last 15 years is no longer viable.
Very little development of any kind is now taking place outside
prime areas in Central London. As regeneration is by its nature
on the margins of viability then it is affected even more severely
than more standard types of development. Paradoxically, however,
the need for an active regeneration agenda is more important than
ever in order to:
— rekindle
economic growth;
— help
rebalance an economy in which dependency on public spending in
many areas has grown to unsustainable proportions; and
— create
places that meet the needs of communities and reinforce social
cohesion.
THE POLICY
RESPONSE NEEDED
6. The key ingredients of any new policy must
be to:
— ensure
that regeneration is driven by a clear economic agenda that has
growth and job creation at its heart;
— strike
the right balance between physical regeneration and job creation
/ skills development;
— focus
scarce resources on those areas where they can have the greatest
impact, not on those areas where the scale of deprivation is greatest—that
will involve taking some hard decisions;
— free
up local authorities to act innovatively and proactively and allow
them to take greater risks; and
— enable
neighbourhoods to play a greater role in remedying signs of decay.
GOVERNMENT INITIATIVES
7. The Government has announced a number of new
policy initiatives intended to foster growth and regeneration.
We are generally supportive of these initiatives, but a great
deal more work is needed to ensure that they operate effectively
in practice. We would offer the following comments:
ENTERPRISE ZONES
8. Ministers have indicated that they are planning
to reintroduce Enterprise Zones in some form and we gather that
more is likely to be revealed of the Government's thinking in
the forthcoming Budget. The British Property Federation supports
this initiative but we would like to offer some thoughts on what
we believe will be needed to make the concept work.
9. The evidence from the previous round of EZs
in the UK shows that, overall, they brought significant benefits.
The criticisms tend to be that the cost to the public purse of
creating new jobs was high, particularly when displacement effects
are taken into account. Moreover, the momentum in some areas flagged
when EZ status ended. Against this, however, there is no doubt
that many of the EZs in the UK served to kick start a process
of regeneration which would not otherwise have been possible with
new factories, offices and other commercial development being
delivered in some very challenging areas and times. The long term
transformation of London Docklands bears testament to this. In
a good number of EZs the momentum established by EZ status has
continued. Moreover, whilst the cost of overcoming locational
barriers is bound to be high it is also important to remember
that there is also a high cost associated with not doing anything.
10. Drawing on the experience of previous EZs
and other area based initiatives the BPF believes that the following
issues should be taken into account in drawing up proposals for
a new set of Enterprise Zones:
FOCUSING ON
THE RIGHT
AREAS
— The
focus should be on stimulating new businesses, business growth
and job creation. Areas for EZs should not, therefore, be identified
purely on the basis of social or economic deprivation but rather
on the basis that the locations and resulting development will
be capable of becoming and remaining higher quality locations
beyond the duration of zone designation. Where a deprived area
has little potential to develop sustainably a better option may
be to help those access employment opportunities elsewhere through,
for instance, improved transport infrastructure.
— Infrastructure
provision and accessibility are critical to the success of an
EZ, particularly in terms of transport, its capacity and the timing
of its provision, but also in terms of access to the technology
infrastructure needed to serve businesses, and the linkages (including
transport/ IT/ networks) with already established commercial areas
and markets to be served.
— In
some areas, where there has already been substantial economic
development but where its completion has been stymied by the recession
(eg in parts of London Docklands such as the Silvertown area),
there may be the opportunity to build on past investment in, and
public sector funding particularly of, transport infrastructure,
by more directly enabling the development of land/sites adjacent
to this underused transport infrastructure (eg by funding site
decontamination and it might therefore be appropriate to reform
land remediation relief in EZs).
— If
businesses are to operate as efficiently and productively as possible
(for example, taking advantage of agglomeration benefits) they
need to be located in the most appropriate places rather than
be diverted into inappropriate places as a result of misconceived
incentives. It will be important to ensure that EZs do not have
this effect.
— To
ensure that the new Enterprise Zones are located in the areas
where they could offer the greatest benefits we see a lot of merit
in a competitive application process.
— There
is a need to avoid the wasted years that usually follow when a
new organisation is set up. The structure/organisation of an EZ
is, therefore, critical. In theory, Local Enterprise Partnerships
could have a significant role in setting up Enterprise Zones as
they bring together both business and local authority interests
and should be able to look at the broader impact that an EZ might
have. As LEPs are unlikely to be fully functional for some time,
however, the only real alternative may be to bolt these onto local
authorities—perhaps requiring them to work out how to secure
local business organisation.
INCENTIVES
— We
also see a case for the nature of incentives on offer being adjusted
to take account of the requirements and characteristics of different
areas. This would also make sense in the context of the move towards
allowing greater local discretion. It would also help ensure that
there was compatibility with other Government schemes such as
tax increment financing. We therefore see merit in the concept
of Local Growth Zones put forward by the Centre for Cities under
which urban locations could choose from a menu of policy options.
— Whatever
incentives are offered within EZs current issues surrounding the
availability of bank finance for property development and investment
will remain a major (and largely negative) influence on the pace,
scale and type of development proceeding. The availability of
finance, therefore, must continue to be an issue high on the Government's
agenda.
FISCAL INCENTIVES
— Tax
incentives were integral to the success of previous EZs. We realize,
however, that the Government may not be in a position to offer
lavish fiscal incentives and so what is available will need to
be carefully targeted. Nonetheless, the fact remains that the
availability of first year capital allowances for the construction
of new industrial and commercial buildings was the single most
important element of previous EZs. Without something similar,
property developers are unlikely to put up buildings ahead of
occupier demand.
— Given
that the industrial buildings allowances will end completely on
6 April, there may be room for a more bespoke and targeted regime.
Thought could be given, for example, to the rates of relief and
circumscribing when relief is available.
— Current
conditions, particularly the lack of bank lending, means that
there may now be a need for some shift of focus towards "front
end" taxes (eg reduced rate of employer NIC to encourage
jobs) in order to kick-start the process rather than sticking
solely with "back-end" taxes such as capital allowances
which can take years to secure and do not benefit all investors).
— A key
difficulty will lie in striking the balance between short and
longer term measures. Short term measures, which will probably
require simple fixes, could adopt the existing tax infrastructure
and look at the scope for exemption or lower rates. Possible measures
could include: exemption from the Community Infrastructure Levy,
business rates and other sticking taxes, a reduced rate or longer
payment period for VAT / SDLT relief to enable efficient pooling
of land interests/reduced rates of SDLT on granting leases.
— Another
key plank of EZs was the encouragement of occupier demand by offering
business rate relief. However, under the old enterprise zones
regime, business rate relief was only available to UK corporation
tax payers. We believe that relief should be extended to all UK
tax-paying business rate payers, regardless of whether they pay
corporation tax or income tax.
— We
would also emphasise that unless rate relief is available in EZs
for empty commercial premises then construction of new development
in anticipation of demand—especially from SMEs, which cannot
always commit to pre-lets years in advance—will be severely
undermined.
— However,
business rate relief is not without its disadvantages. It can
push rents up. More importantly, its advantages for local authorities
may be offset by the associated loss of revenue in a world with
greater local retention of rates.
— It
is important to remember, too, that many firms in EZs benefitted
not just from the specific EZ incentives but also from more generally
available grants and other benefits. It is therefore important
to consider the whole package of both EZ and non EZ benefits that
may be available within an area.
PLANNING
— Simplified
planning regimes were not as important as fiscal incentives in
getting development underway in EZs. Nonetheless, the scope for
development to proceed without going through the usual planning
application process (but within locally defined, general guidelines)
would be an important part of any package of measures aimed at
encouraging developers to supply buildings ahead of market demand.
Allowing an EZ to do an SPZ / Neighbourhood Order, therefore,
might be helpful.
— The
constraints of the current EIA regime (and sustainability targets)
which are now in place need to be addressed—consideration
needs to be given to whether these requirements could be reviewed/
relaxed to ease the burden.
— There
will be a need to consider how the Enterprise Zone concept would
sit with today's far more demanding planning obligation system,
and CIL. It would seem odd to be providing capital allowances
and other incentives for developers to produce new buildings,
only for them to be hit by other taxes, planning obligation requirements
and charges.
— Given
the focus within Government on land availability there is an opportunity
to use EZs to pilot simplified compulsory purchase order processes.
It might also be feasible to allow compensation to be paid in
the form of shares in the eventual development—a sort of
compulsory land pooling exercise.
SKILLS
— The
availability of labour (and of the public transport needed to
deliver that labour to the EZs) should be a major consideration
in the designation process. Equally, skills development and training
must be an important part of the EZ package if the local population
is to benefit.
TAX INCREMENT
FINANCING
11. With few projects stacking up in conventional
development appraisals, there needs to be a more creative approach
to attracting new investment from the private sector. We are delighted
that the Government has indicated its commitment to take forward
tax increment financing (TIF) in order to facilitate the upfront
funding of the infrastructure that is so often crucial to project
viability. It is disappointing however, that TIF is already a
reality in Scotland whilst its introduction in England still looks
a long way off. It is significant that all of the leading law
firms that we have consulted believe that TIF could be introduced
in England (as it has been in Scotland) without the need for primary
legislation. They believe that the necessary powers already exist
and that the Government is unnecessarily opting for a belt and
braces approach. We have yet to see a convincing explanation from
Government as to why primary legislation must be introduced before
TIF can be used in England.
12. Given its potential to unlock a significant
number of stalled schemes, TIF should be introduced at the best
possible time ie when the economy is emerging from a downturn.
It would also make sense to take maximum advantage of the current
interest in and enthusiasm for TIF.
13. We look to Government to publish the key
ingredients of its TIF proposals within the next few weeks, and
at the same time initiate a process for setting up the first tranche
of TIFs so that the necessary preparatory work could run in parallel
with the passage of the enabling legislation (which we gather
is likely to run from summer 2011 to spring 2012). Such a twin
track approach would mean that when the legislation was enacted
a range of "vanguard" schemes would be ready to go.
If this is not done, then it could be 2014 or 2015 before we see
the first English TIF emerge, hardly an indication of dynamic
government, and a terrible waste of the work done by a number
of councils with developments or schemes that could go ahead now.
14. A key advantage of TIF is that it is a highly
flexible mechanism. In particular, it allows the upfront funding
that is needed to be derived from a range of sources and the risk
to be allocated in the most efficient and appropriate way. Such
flexibility is essential to ensure that funding approaches can
be tailored to meet the particular needs of different schemes.
This is particularly the case as certain funding models might
be more attractive than others according to the prevailing economic
conditions. Under current economic conditions, for instance, issuing
bonds into the capital markets for a new vehicle such as TIF might
not be immediately attractive (unless perhaps some form of government
guarantee is provided). However, that could change when economic
conditions improve and TIF becomes a more established and investable
proposition. It is also important to remember that the capital
markets may offer an appropriate mechanism for refinancing TIF-backed
borrowings initially raised from other sources (including the
Public Works Loan Board). Any new TIF regime, consequently, should
seek to provide the flexibility that will be needed to make TIF
operate effectively over the longer term.
It is important, therefore, that provision is made
to allow for the following funding models:
— Public
sector funding: a local authority should be able to borrow the
money needed to pay for the infrastructure from central government
(probably the Public Works Loan Board), based on a business case
and financial modelling to demonstrate the tax increment underpinning
the authority's ability to service and repay that borrowing. The
project could be structured to put the risk of tax increment not
materialising on the public sector or the developer, or to share
it between them.
— Capital
markets / bonds: the most common way of funding a TIF in the USA
is by the issue of municipal bonds based on anticipated incremental
tax revenue streams and benefiting from a tax exemption for interest
paid to bondholders. The pricing of the bonds (and even the willingness
of capital markets investors to buy them at all) will inevitably
be a function of their risk profile. The greater the risk that
interest or principal on the bonds may not be paid in full, the
greater the likelihood that the market will impose a higher interest
rate on the bonds, or that it will be willing to lend only a smaller
sum or only for a longer period (so that annual debt service represents
a smaller fraction of the anticipated tax increment that year).
In any event, the UK does not have the large and varied municipal
bond market of the United States, of which TIF bonds represent
only a small proportion. Partly for that reason, and partly because
UK TIF is a new concept, the costs of using a bond issue in the
UK today are likely to be significantly higher than those arising
from the other TIF financing models. The appetite of the capital
markets for such bonds is likely to be limited in the short term
unless they benefit from a public sector guarantee of some kind.
— Developer
funded TIF schemes: the basic principle behind the concept of
developer funded TIF schemes is that instead of a local authority
borrowing to fund TIF eligible expenditure, that expenditure is
effectively financed by the owner/developer of a TIF site using
his own resources. The developer is then repaid out of tax increment
when it arises. With this kind of structure, the local authority
can entirely lay off both construction risk and the risk that
the tax increment will fall short of expectations on the developer.
A clear advantage of this approach is that developers understand
how to assess development cost, estimate development value, manage
development risk and secure development capital.
INCENTIVISING DEVELOPMENT
15. The Government has also announced various
proposals designed to incentivise local authorities to take a
more positive approach to development proposals.
16. We back the proposed New Homes Bonus scheme
and also welcome the fact that the Government is moving towards
allowing much greater local retention of business rate revenue.
Breaking the link between local authorities and rating income
has been deeply damaging, giving local authorities no financial
reward for fostering beneficial development. Greater retention
of rate income would provide a much stronger motivation for local
authorities to back new development that generates economic activity
and creates new jobs.
17. The promised introduction of a presumption
in favour of sustainable development is another important element
that will re-enforce the pro-growth agenda. However, there needs
to be clarity about the status that this will have. It is essential
that it is not hedged around with so many caveats as to be meaningless
in practice.
18. We welcome government assurances that new
Neighbourhood Plans are intended to be engines of growth, giving
neighbourhoods the opportunity to increase but not to reduce the
totality of development envisaged for particular neighbourhoods
in the Local Plan. We have strongly argued the case for businesses
and landowners to be able to take the lead in putting together
Neighbourhood Plans in predominantly commercial districts and
we are encouraged by strong indications that the Government is
supportive of this view.
LOCAL ENTERPRISE
PARTNERSHIPS
19. The introduction of Local Enterprise Partnerships
has been an unnecessarily rushed process. Insufficient thought
was given to their role and resourcing. However, with most LEPs
now in place, the key now is to see what they can achieve in practice.
We would make the following points:
— Clearly,
no one wants to see LEPs develop into mini-RDAs with bureaucracies
to match. Instead the emphasis should be on greater sharing of
skills and resources between local authorities (for instance in
areas such as land assembly, decentralised energy, regeneration
and conservation), possibly with each participating local authority
taking a lead role in a specific area. However, LEPs are unlikely
to function effectively without a small but high quality and highly
motivated core secretariat.
— We
understand that the Government wants to see them focusing more
on delivery than on strategy. Their focus has got to be on combating
barriers to growth including issues relating to planning, infrastructure
provision, skills and business access to finance.
— LEPs
have the opportunity to play a valuable role in delivering the
strategic planning that will continue to be needed in areas such
as infrastructure, housing supply and waste. Whether they are
able to rise to this challenge will be an early test of their
credibility.
WHAT OTHER
MEASURES ARE
NEEDED?
20. Building on initiatives that the Government
is putting in place we feel that the following measures could
also make a big difference.
Reform procurement
21. The labyrinthine process of public procurement
associated with major regeneration projects presents one of the
greatest barriers to private sector involvement in such projects.
Many of these projects are on the margin of viability at the best
of times and even more so in current circumstances. There is a
need to ease the path of potential investors rather than impose
often absurdly over-engineered procurement requirements and ever
increasing demands for greater information. As a priority, the
Government should overhaul the procurement process with the avowed
objectives of making it more proportionate and less wasteful.
Support innovative infrastructure funding solutions
22. There is a need for imaginative thinking
about other ways of unlocking potentially viable schemes. Given
the paucity of finance and funding within both the public and
private sectors progress is likely to depend on the emergence
of new types of joint ventures between the two sectors. TIF is
one way forward but will only be suitable in the right circumstances.
A major Government priority should be to explore the scope for
new types of joint ventures which LEPs could play a part in taking
forward. The BPF would be happy to offer assistance in this process.
Use Government resources more efficiently
23. There are numerous examples of public funding
being pumped into areas over many years in an incoherent and uncoordinated
way with little understanding of what additional benefits could
be leveraged off each individual investment and no proper evaluation
of the impact on economic growth or jobs. Our key messages here
are:
— Don't
waste resources on schemes that have little prospect of viability.
Focus resources instead on schemes which can make a difference.
In many cases, this will involve bringing back competitive bidding
approaches to encourage innovation and reward those with the best
ideas whilst helping disadvantaged areas that may be less well
equipped to put together successful bids. We note that competitive
bidding will be a central feature of the Regional Growth Fund.
— Fully
embrace the concept of Total Place/Total Capital that seeks to
achieve a more joined up approach to all funding destined for
a particular area, creating shared facilities where feasible.
There has been a lot of rhetoric about this but the reality on
the ground is often very different.
— Sort
out some issues which are currently constraining the take-up Local
Asset-backed vehicles. Including, in particular, fears about state
aid.
Make better use of public sector powers and assets
24. Local authorities should be encouraged to
use their role as enablers and their new general power of competence
in order to facilitate and, where feasible, "de-risk"
regeneration schemes.
For instance they might:
— seek
to use their land assets more constructively than they have in
the past to achieve longer term regeneration objectives;
— do
more to expedite land assembly, an integral part of most regeneration
schemes which often involves significant time, cost and associated
risk; and
— along
with other public bodies, use their role as of the largest occupiers
of space in the country to promote regeneration.
Use planning to drive economic growth
Delivering economic growth requires an efficient
and suitably resourced planning system. The current review of
the planning system provides an opportunity to put more supportive
structures in place. We would like to see:
— The
creation of a National Planning Policy Framework that has the
achievement of sustainable growth as its core objective and which
reduces the volume of guidance to a more manageable level. As
we have mentioned above, the introduction of a meaningful presumption
in favour of sustainable development will be a crucial part of
this framework.
— Full
implementation of the Killian Pretty Review recommendations aimed
at improving the planning application process. The Government
has committed to doing this and we hope that it will carry through
the necessary changes as soon as possible.
— An
overhaul of the cumbersome and often over-the-top Environmental
Impact Assessment procedures.
March 2011
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