Weathering the storm, by Malcolm Cooper

18 Jun 08
There's an ill wind blowing and it's threatening the government's housing and urban regeneration plans. But there are ways to mitigate the worst effects of the credit crunch

19 June 2008

There's an ill wind blowing and it's threatening the government's housing and urban regeneration plans. But there are ways to mitigate the worst effects of the credit crunch

Six months ago, the credit crunch still seemed like a distant and very US problem. This is no longer the case. One medium-sized British financial institution has already failed, and its larger cousins have been forced to make very large debt write-offs and severely constrain lending. What might initially have seemed a City problem, the consequences of which would be felt largely by high-riding brokers and investment bankers, is now darkening the horizon across the UK urban landscape.

The mortgage market, if not quite imploding, has contracted to the point where would-be borrowers are struggling to find finance even though house prices themselves are falling. Large-scale commercial and mixed-use developments, the flagships of Britain's urban renaissance, are now facing delays and possible downsizing.

A chill wind is already blowing down the high street, with falling consumer confidence exacerbated by continuing inflation in food and fuel prices. Finally, unemployment is beginning to edge upwards. The financial services sector, the prime mover in jobs growth across most of Britain's cities, is already experiencing some job cuts, and the likelihood is high that these are only the beginning of a phase of systematic retrenchment.

What does all this mean for regeneration and, in particular, for Britain's cities? The general answers are fairly stark. Levels of funding, both from the public coffers and from private developers, are likely to fall. When the availability of capital is restricted, housing affordability is unlikely to improve despite falling prices, and the government will struggle even more to meet its targets for new homes and affordable housing. Skills and employment policies, which have recently been focusing more and more on the long-term workless, are now also going to have to wrestle with falling overall employment rates.

These questions are clearly exercising minds at the highest level. Local government minister John Healey has just commissioned a study of the global credit crunch and how this might affect regeneration, voicing his determination to transform the UK's most deprived areas. 'The tightening terms of credit, uncertainty in the housing market and slower economic growth could all have an impact on regeneration investments. I want to make sure we understand these risks,' he told a recent regeneration conference. The study, led by Michael Parkinson of Liverpool John Moores University, is intended to run alongside the Department for Communities and Local Government's consultation on a new regeneration framework, which is due for publication this summer. Both pieces of work are extremely timely. While regeneration is a long-term process with far-reaching investment horizons, the shorter-term progress of individual regeneration initiatives could be at risk in a harsher economic climate.v It is then a gloomy picture. But there are a number of areas in which a shift in the policy balance might mitigate, if not completely cure, the pain.

At the overall regeneration policy level, there will need to be a change of emphasis from stimulating growth to building up resilience. The way forward here should be a local one, within which local authorities and government agencies can play an important role. With room for manoeuvre constrained by relatively scarce public spending and private capital, cities will need to re-prioritise resources towards supporting their existing areas of strength, or, in cases such as financial services where contraction is inevitable, to build up alternative bases of business and employment.

The current downturn does not yet look like becoming a global recession. Local business support strategies could usefully be reconfigured to provide support to both existing businesses and potential start-ups, which could absorb skilled labour from other less robust parts of the economy. Retrenchment in the financial and business sector could could actually produce a need for new consolidated workspace in some of our cities.

There should also be a way forward on the housing front. Demanding market conditions will require more adaptable and flexible housing in cities – to accommodate a workforce that will need to relocate to areas where jobs can be found. At a time when fewer and fewer people have a realistic chance of owning their own homes, institutional development of the private rented sector could provide the flexibility to support local labour markets.

A larger rental sector, with more high-quality, professionally managed houses and flats, could also play a role in stabilising local housing markets. This was one of the main messages of the recent report from the parliamentary all party urban development group, Delivering urban homes: the role of the public and private sector. It also forms the basis of a study from the Centre for Cities and the Smith Institute on the future of the private rented sector, published on June 16.

Many cities already face substantial barriers when it comes to providing housing. The Homes and Communities Agency will need to give urgent thought to the kind of additional support that local authorities require: for example, with skills and capacity to attract the right type of investment and encourage partnership working with the private sector. Local councils need to find viable ways to help developers of affordable housing spread their financial risk.

The challenge of reducing levels of worklessness, perhaps the arena in which regeneration-driven interventions have struggled the most to achieve real impact over the last decade, is likely to become even more difficult as the supply of jobs shrinks. Through most of the recent period of employment growth, the number of economically inactive people on welfare benefits has been increasing and has only just begun to fall. Cities contain 59% of the country's population, and provide two-thirds of the jobs – but they also have 64% of the workless and 68% of benefit claimants.

There are no easy answers here. It is clear, however, that unemployment is a brake on city growth, and a barrier to social inclusion. Many cities are already prioritising reducing worklessness in their economic development strategies. With job supply tightening, it is all the more important to seek city-specific solutions to city-specific problems.

One of the big steps forward required here is to create and empower city-regional Employment & Skills Boards – and give them the tools and the resources to boost employment. A new report, Worklessness: a city approach, written by the Centre for Economic and Social Inclusion for the Centre for Cities, recommends that the government should build out from its City Strategies initiative to create ESBs for all city-regions. The boards should be given responsibility for: determining the spending priorities of the Working Neighbourhoods Fund; delivery of European Social Fund projects; working with the Skills Funding Agency to prioritise adult skills funding according to economic need; and participating in the selection of contractors delivering employment services on behalf of the Department for Work and Pensions.

Overall, ESBs should have responsibility for working with employers to improve skills through workforce development.

Tighter public spending and more challenging economic conditions will constrain British cities' room for manoeuvre and freedom to regenerate over the next few years. Local councils, under pressure to make efficiency savings, will need to get to grips with their new economic development role, working more closely with neighbouring authorities and local businesses.

Cities will also need financial flexibility to target resources, boost resilience and ultimately strengthen their economies. In order to sustain investment when times are difficult, they need more political and financial powers to give them more room to innovate when facing regeneration challenges. Two specific policy levers suggest themselves.

The first is city-regional government. City economies would be best-served by statutory city-regions based around real economies, with a package of powers and spending freedom at their disposal. The London model, including a directly elected mayor with strategic powers over transport, housing and skills, offers a potential way forward.

The second is making it easier for cities to borrow money for major economic infrastructure projects in city-regions. The Treasury could provide technical assistance to help city governments bridge market conditions and improve procurement efficiency to support local economies and deliver value for money.

Bringing city-regions and financial institutions together under Treasury guidance to broker financing deals for infrastructure and housing projects could support the resilience of city economies – and lay the conditions for future growth.

It is critical that the government's new regeneration framework takes account not only of a less friendly economic environment, but also of the vital role cities must play in meeting its challenges. In order to respond to fast-changing economic conditions, local authorities need more freedom to fix local problems – and new financial instruments for regeneration that will lay the groundwork for sustainable growth once the current storm has passed.

Liverpool and Sunderland: a tale of two cities

The port cities of Liverpool and Sunderland illustrate some very different regeneration challenges emerging from the credit crunch.

Both were cornerstones of the North of England's industrial success, Liverpool as a hub of global maritime trade and Sunderland as one of the world's largest shipbuilding centres. Both cities have had to face a long period of readjustment to the realities of Britain's post-industrial service economy and both have already shown distinct signs of recovery.

Employment growth in Liverpool moved up from 1.1% per annum in 2001/03 to 2.7% per annum in 2003/05. Gross value added growth was even stronger, moving up from 1.6% per annum in 2001/03 to 5.2% in 2003/05. In Sunderland, the compound annual employment growth rate from 1995 to 2005 was 2.3%, while weekly earnings rose by over 5% per annum between 2002 and 2006. In both cities, however, regeneration is very much unfinished business.

Liverpool, now in the midst of its year as European Capital of Culture, has made huge steps forward, but has arrived at a critical delivery point in the long-term regeneration of its city centre. The first major retail units of the ambitious Liverpool One project have just been opened. The complete site will include 2.4 million square feet of space (two-thirds of it retail), and is intended to create more than 4,500 jobs.

On the face of things, the timing looks less than optimal, but preliminary indications are favourable. With a well developed destination centre strategy, encompassing culture, retail and leisure facilities, already in place, and visitor numbers high, there is a chance that Liverpool could buck the downward economic trend.

On the other side of the North of England, Sunderland faces a different challenge. It has had significant success in attracting new businesses to state-of-the-art, out-of-town business parks, and is launching a software development initiative.

But regeneration of its city centre has not yet really taken off. The challenge the city faces is not so much turning new developments into sustainable sources of growth as launching the developments themselves. With credit markets all but locked down, and developers disinclined or unable to take on new commitments, many areas are struggling to move projects on. However, developer interest in Sunderland remains strong and the city must look to the longer term.

Neither city is likely to find the way forward an easy one but each has an opportunity. Liverpool is well placed to attract more businesses — including some that might be seeking to consolidate sites for regional offices elsewhere in the country. Such new arrivals will not only increase the productivity of the local economy but also bring in customers for the improved retail and leisure services.

Sunderland will need to be determined with its city-centre regeneration schemes. The experience of previous property shocks suggests that developers come back quickly when the current downturn begins to ease, so Sunderland could position itself at the start of the next wave.

As local government minister John Healey has emphasised: 'While we need to assess the influence of the current market sentiment we also need to recognise that regeneration is a long-term process and investment horizons are likewise long term.'

Malcolm Cooper is head of research at the Centre for Cities


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