Further written submission from Igloo
Regeneration
1.0 IGLOO REGENERATION
This paper is provided by Igloo Regeneration, the
development manager of Aviva's Igloo Regeneration Fund (www.igloo.uk.net),
described by the United Nations as the world's first responsible
real estate fund. Igloo's expertise is in the funding and delivery
of physical regeneration. Our experience is in urban, rather than
rural, regeneration and our comments are made from this perspective.
The paper responds to the Select Committee's request
for further evidence and their specific questions.
2.0 RESPONSES
TO SELECT
COMMITTEE SUPPLEMENTARY
QUESTIONS
2.1 What is the distinction, if there is one,
between a property company and a regeneration company?
2.1.1 Urban regeneration is defined by Treasury
as "a process that reverses physical, economic and social
decline in an area where market forces will not do this without
intervention". In this context physical regeneration is the
process of property development that only happens through public
sector financial subsidy due to lack of viablity in deprived areas
(because otherwise it would be property development).
2.1.2 Most property development companies regard
unviable projects, deprived areas and public investment as things
to be avoided.
2.1.3 Regeneration companies conversely target
these areas, projects and investments and have developed the skill
base and the culture needed to operate in these more complex environments
in partnership with local communities, social enterprise and the
public sector.
2.1.4 The skills these companies require include
specific expertise in community engagement, local government partnership,
public funding, marketing, design, environmental sustainability,
local employment, creative industries as well as the core property
development skills. There is an overlap with development industry
skills and regeneration can be considered a specialist niche of
the property development industry.
2.2 What made you invest in regeneration in
more prosperous times?
2.2.1 The evidence (from the Universities of
Aberdeen, Ulster and Dundee and from the Investment Property Databank
Regeneration Index) is that investing in deprived areas produces
broadly the same returns as investing in prime locations and that
where Government is also investing in deprived areas (regeneration
areas) then returns are 20% ahead of the market.
2.2.2 This evidence appears consistent over the
last two decades although the greater volatility of locations
like the City and West End of London and of sectors like large,
particularly out of centre, retail, has meant that regeneration
has periodically under and overperformed this benchmark due to
its lower volatility.
2.2.3 In the boom we found regeneration investment
challenging as a wall of development debt, from the Irish and
Scottish banks in particular, encouraged speculative development
by a number of newly created organisations. Much of this investment
was of poor quality and ill judged and has left a legacy of unused
derelict sites, half completed buildings and poorly designed and
constructed buildings and places in the hands of the banks who
lack the skills to deal with it effectively from a regeneration
perspective.
2.2.4 We made relatively few investments in the
later stages of the boom.
2.3 What is constraining your ability to invest
at the present time?
2.3.1 Igloo Regeneration is cash rich with substantial
undrawn banking facilities. We are working hard to invest this
money this year. We are conscious that we have virtually no competitors
who have access to capital at present. We are finding that very
few private sector landowners (particularly the banks) are prepared
to sell at current market values. This is mainly because they
are unwilling to crystallise their losses and they have no interest
in delivering regeneration. We are disappointed that the Project
Merlin agreement did not deal with this.
2.3.2 The situation is easier with public sector
land. We are members (jointly with Carillion) of the Homes and
Communities Agency's Delivery Partner Panel. This is increasingly
being used by local authorities to procure development partners
due to its advantages in speeding up the procurement process compared
with following OJEU procedures for each project.
2.3.3 However the panel is frequently not being
used as originally intended for schemes that the public sector
has de-risked and some local authorities still have unrealistic
expectations of the market. This is a critical problem because
public subsidy for regeneration has effectively dried up and land
value is one way to achieve subsidy. The projects that we are
able to take forward therefore depend on innovative and complex
financial engineering combined with a focus on the least unviable
uses and flexible and responsive public partners.
2.3.4 There is also a problem in relation to
s106 for affordable housing. This poorly designed and market unresponsive
mechanism depresses development land values reducing housing supply
and regeneration. There is now a conflict between low land values,
unviable affordable housing planning policies and the removal
of grant for social rented housing that means that few new urban
residential schemes are viable and where they are each one requires
the negotation of a s106 agreement that does not comply with out
of date local planning policies.
2.3.5 We are however managing to create viable
projects on the edge of the UK's top 20 city centres by using
mechanisms like Build Now Pay Later, JESSICA, Business Premises
Renovation Allowance, local asset back vehicles, public sector
leases, reinvestment of land value in equity loans, National Affordable
Housing Grant, ERDF, Derelict Land monies (in Scotland and similar
funds in Wales), equity loan structures, s106 negotiations and
s31 monies.
2.3.6 Often these various mechanisms have to
be combined and we are finding that there has been a significant
increase in funding complexity and that there is now a substantial
premium on regeneration funding skills. This complexity has also
slowed projects down although the current market stability provides
a good foundation for complex project finance structuring.
2.4 Do you think the Government's current
plans will encourage investment in regeneration?
2.4.1 The process of change that Government has
introduced will discourage regeneration investment in the short
term. The loss of the RDAs (and the area based regeneration bodies),
the changes and reduction in the NAHP (and its disconnection from
the planning system) and the failure to date to use RGF to match
ERDF have all been discouraging.
2.4.2 However the extension of BPRA is welcome
(although tax allowances of this kind discourage and crowd out
long term investment by pension funds and insurance companies
who are displaced by shorter term high net worth investors) as
is the encouragement to local authorities and other public sector
land owners to use their land assets creatively to deliver regeneration.
2.4.3 The Regional Growth Fund is also welcome,
although it is a very small amount and in the irst phase is being
used in ways that seem unlikely to result in the regeneration
of deprived areas.
2.4.4 The biggest concern though is the move
towards a "winner takes all" approach to public finance.
Mechanisms like CIL, s106 and New Homes Bonus do not work in regeneration
areas where development land values are negative. There is also
the potential for these mechanisms, if they work as Government
intends to encourage communities to accept new development in
their neighbourhood plans, to result in an expansion of suburban
development which would hasten the hollowing out of urban centres
that we see in extreme form in places like Detroit.
2.4.5 We are concerned that the current review
of business rates will similarly move resources to higher value
areas and that Tax Increment Finance (if it continues to be deliverable
in the future local governemnt finance environment) will be used
for projects like large retail centres rather than mixed use development
in deprived areas. There is a significant amount of policy confusion
around the Local Government Resource Review and Enterprise Zones
and Tax Increment Finance. The current form of EZs are starting
to look simply distortive (resulting in displacement from deprived
areas not growth) rather than regenerative and where they are
located on the edge of the Green Belt on urban fringes they look
like ways of enhancing public sector land values rather than helping
deprived communities.
2.4.6 There are potential conflicts between policies
that target growth and policies that target regeneration. Short
term growth might be most easily achieved through developing Green
Belt locations on motorway junctions in a market free for all.
However this would result in significant costs to the public purse
in dealing with the need for infrastructure in these locations
and in dealing with the resultant failure of inner urban neighbourhoods
and in relation to climate change. In less extreme ways we are
seeing these policy conflicts regularly at present eg the proposal
to change the Use Classes Order to allow the conversion of business
premises to residential will damage small high tech businesses
in locations like Silicon Roundabout in London as it drives up
their rents and drives them out of their local business networks.
2.4.7 There are also conflicts between localism
policies and regeneration. By definition, neighbourhoods in need
of regeneration have a limited asset base in terms of land and
tax revenues. Thus the neighbourhoods that most need investment
will be the ones least able to raise it themselves. The transfer
of resources from higher value areas to lower value areas is necessary
to achieve regeneration and to release the benefits of regeneration
(eg reduced costs of healthcare, polciing, welfare etc) to society
as a whole.
2.5 Which areas will be most and least attractive
for investment under the new arrangements and why?
2.5.1 UK real estate investment is currently
flowing to low risk investments (strong occupier, particularly
the public sector, financial covenants, long leases, prime locations)
and to London and the south east and a few other high value hot
spots around the country. Much of the focus on London is based
on overseas investment and the current exchange rates.
2.5.2 In the absence of government regeneration
policy to encourage investment into areas where investment will
bring public benefits we do not see this trend changing in the
short term although we do anticipate a degree of rippling out
from the south-east as confidence and the economy grows.
2.6 What more could Government do to help?
2.6.1 This question invites the design of a policy
response for regeneration investment. We are hopeful that the
Government is interested in engaging in this important and urgent
debate and that the Select Committee Inquiry will help to start
the conversation.
2.6.2 We recognise the current risks around UK
public finances and the need to ensure that interventions reduce
these risks. However we also recognise that we are not in a situation
where "there is no money left" but one in which the
priorities for spending need careful consideration.
2.6.3 We do not believe Government has a sufficient
focus on the costs to the public purse of areas of concentrated
deprivation. We believe that successful regeneration, and the
arrest of the spiral of decline in the worst areas, has a positive
financial return to public investment in terms of reduced welfare,
healthcare, policing and other similar costs.
2.6.4 Government seeks to invest its scarce resources
in ways that maxmise its returns (financial, social, environmental
and economic) and we believe that public regeneration investment
provides strong returns.
2.6.5 Within urban regeneration such investment
should also be used in ways that provide the best returns and
we believe this will usually be in ways that bring increased private
investment.
2.6.6 While the optimum approach to regeneration
varies from place to place there are some common lessons that
have been learned over the past three decades including the need
to:
— 1. Create
incentives to work in the benefits system.
— 2. Limit
urban sprawl.
— 3. Encourage
sub regional prosperity.
— 4. Focus
on small areas.
— 5. Dedicate
delivery teams.
— 6. Bring
together public funding streams and lever in private finance.
2.6.7 So our policy prescription would be to
focus limited resources on deprived neighbourhoods in sustainable
locations with the potential to become self sustaining through
attracting private investment eg those on the edge of city centres.
2.6.8 Based on our extensive current frontline
market experience we would advocate Government (both central and
local) doing this by:
— Transferring
resources from wealthy areas to deprived areas (and retention
of resources in deprived areas through mechanisms like TIF designed
to incentivise private investment).
— Using
non financial mechanisms like guarantees, CPO powers (land assembly)
and leases to share regeneration risk.
— Using
assets and developer procurement to achieve high quality regeneration
outcomes—design, sustainability, health, happiness, well
being and local social and economic outcomes.
— Allowing
local authority financial flexibility.
— Supporting
investment in new schools in regeneration areas ahead of demand.
— Moving
from tax based to grant based incentive mechanisms to encourage
long term investors.
— Using
and extending Regional Growth Fund to match ERDF for both ERDF
grant and JESSICA.
— Aligning
planning policy (s106), the National Affordable Housing Programme
and regeneration funding to facilitate physical regeneration in
deprived areas.
— Giving
all publicly funded bodies and statutory utilities a regeneration
objective/duty (eg Network Rail, British Waterways, Water Companies,
the publicly owned banks).
— Supporting
a highly skilled public sector regeneration capacity within the
Homes and Communities Agency to support communities and local
government led regeneration.
— Amending
the General Disposal Consent and OGC guidance to align them with
the European Land Sales Directive and encourage assets sales at
values that encourage high quality regeneration.
June 2011
| 
