In these uncertain times, councils can take a more hands-on approach to development and regeneration. Paul McGuinness of GVA Financial Consulting discusses the options
It is likely to be some time before the implications of the Comprehensive Spending Review are clear for local government. Headline cuts are known but the full picture will have to wait until the details of the local growth white paper, the Localism Bill, housing reform and other announcements have been analysed.
One thing is clear: local government will have to do more. To enable this, Local Government Secretary Eric Pickles has talked up the greater ‘freedoms and flexibilities’ being offered, including ending ring-fenced budgets, the introduction of Tax Increment Financing (Tif) and reform of the housing finance system. There might be more politics than policy in this but every little helps, and local government should take full advantage.
The new powers should not be looked at in isolation. Combined with existing freedoms under the prudential regime and the opportunities in councils’ asset base, they give local authorities a powerful set of tools with which to invest in local assets and infrastructure.
Our column last month highlighted the opportunities for councils to generate value from their assets through joint venture structures (‘Estate of the nation’, October 8–21). But this will not always be a viable option in the current economic climate.Developers might be unable to secure finance or unwilling to take on projects deemed risky.
In response, local authorities are exploring opportunities to take the lead themselves. One way is investing in infrastructure to bring forward development. With central government funding restricted in the medium term, Tif is being heralded as a major alternative. This would allow councils to borrow to spend money on infrastructure based on the predicted income it would generate. Its usage is likely to be restricted to business rates, however, and it will be subject to Treasury approval.
Another approach to funding infrastructure is to levy an annually increasing charge on development land. The charge can be used as security for any enabling loan, thereby negating the risk associated with future income and encouraging developers to develop. A combination of this approach with Tif could pay for significant infrastructure for mixed-use developments, while protecting local authorities from taking on excessive risk.
Local authorities can go further and become developers themselves, if they have the money and in-house skills. Councils in this position can save up to 20% of development costs by not paying premiums to a developer. However, this saving must be offset against the extra risk the council is taking.
Two potential additional reforms would complement this approach to development. First, changes to the housing finance system should allow councils to take a lead role in the provision of affordable housing. Secondly, if funds allocated by the Homes and Communities Agency move, as predicted, to a ‘single pot’ approach, local authorities would be able to be much more innovative in their use of funds.
Councils that take on the developer role can also set up a Special Purpose Vehicle, enabling risk to be ring-fenced. The London Borough of Lewisham took this approach when it bought Catford shopping centre from owner St Modwen this year. The purchase was carried out through an SPV as part of the council’s long-term regeneration plans. It was funded by prudential borrowing and predicated on the assumption that lease payments from the centre would support all interest and finance costs.
As a result, the council is now able to have a direct influence over the shape and design of a future Catford and also benefit from any rise in the site’s value through development.
But not all local authority assets will have a significant market value in the short to medium term. In these instances, there can be a broader public benefit from transferring them to other organisations or into community ownership for the development of housing and other local infrastructure. This allows the council to both divest itself of assets that are not contributing to its strategic plans or income and improve the area at the same time. It can also strengthen the feasibility of some development plans by removing land costs from future appraisals. The Community Land Trust is one model that has been developed to enable such transfers.
These are just some of the ways in which local authorities can play an active role in development. Where the business case can be made, they will be able to use their existing and new powers to invest in capital assets and infrastructure in their area. This will not only help them to lead their local economy out of the current downturn but also give them the opportunity to meet broader social and economic regeneration objectives – and potentially participate in future rises in market values.
Paul McGuinness is a senior consultant at GVA financial Consulting
