The government has doubled the size of the English Cities Fund and renegotiated its funding so that it no longer takes a “first loss” hit on its regeneration schemes.
The partnership between Homes England, Legal & General and Muse Developments will now have £200m in financial backing to work with local authorities on large, complex regeneration projects around the country.
According to ECF chair Sir Michael Lyons, the success of the original £100m fund has meant the government has been able to renegotiate the funding of the partnership. It will now be on an even footing with the other two investors and not forced to take any potential financial hit through a “first loss” arrangement.
How the fund worked
The original partnership was set up in 2001 to act as regeneration vehicle that could take a far longer-term view of sites, and not be driven solely by investor returns. It was thus able to target schemes in need of regeneration but off the private sector radar.
“What we look for is a strong authority with a sense of vision of what it wants to achieve and ideally an ability and willingness to share the risk. That way you get better quality and are able to do more ambitious things,” says Lyons.
Half of the original fund consisted of a £50m loan from Barclays and the rest was supplied by the three partners. A £25m tranche came from English Partnerships, now Homes England, and the other £25m was split between Muse and L&G. Part of L&G’s cash was mezzanine funding, but all three had equity.
This model will be repeated, though at double the scale, and with the bank loan possibly being provided by a consortium of lenders.
“In the first fund, because it was dealing with uncharted territory, English Partnerships entered into a first-loss arrangement, so any losses were borne by public investment. That’s not the case in the second phase,” says Lyons.
The initial funding also worked on a revolving basis, so the money was recycled as it was returned from sales, which will also continue, making the £200m goes further.
Profit has already been paid out, with both Muse and L&G paying the equivalent of distributions. According to Lyons, while the government money has yet to turn a profit because of the structuring of the deal, it will see a profit as the existing schemes progress.
“The critical thing for me is to get a return on the public investment as well. It is not enough to just sink the public investment and let the private sector take the return,” he says.
The future of the ECF
In the coming years, the fund will be targeting opportunities with local authorities or public sector organisations that are landholders, promoters or stakeholders in key regeneration areas, ideally on projects valued at more than £100m.
As part of its remit, the fund will continue to target developments that benefit the public sector and repel the private sector.
“We are changing places, that’s the thing that matters. And we are not competing with other investors. We don’t go to areas where there is competition taking place,” says Lyons.
The original fund was one of the first investors in Salford, in greater Manchester, and Canning Town, in east London, which have since become extremely attractive areas. It is looking for projects that stimulate local development, and that also generate different types of dividend for the local community, apart from just financial returns.
“We understood that the local community, through its local council, will have dreams and ambitions. Our job is to see how they can be advanced,” says Lyons.
“That leads to the dividend from the development – where improved value is secured – being taken in whatever way seems most appropriate.”
Schemes being delivered
With the initial £100m the fund is building out five schemes with a total value of £1.6bn.
It is about halfway though, and has so far built 850,000 sq ft of office, retail and leisure space and 1,300 homes. A further 2,210 homes and 820,000 sq ft of new commercial development is yet to come.
It has secured more than £800m in third-party investment.
Rathbone Market, Canning Town, £180m
Part of the Canning Town & Custom House regeneration programme, the scheme comprises a 406,000 sq ft mixed-use development with a commercial district, 740 flats over three phases, and a refreshed high street, as well as a new market, two public squares, a public library, community centre and new retail space.
Salford Central, Greater Manchester, £650m
Started in 2002, this 50-acre site includes two distinct areas, Chapel Street and New Bailey. When complete it will create 11,000 jobs, and provide 2.2m sq ft of commercial space, 849 new homes and 390 hotel rooms. It will also link Manchester University to Spinningfields through a revitalised Chapel Street.
Merchant Gate, Wakefield, £130m
The first phase produced a new commercial quarter in Wakefield’s city centre that includes 100,000 sq ft of office, retail and leisure space with 66 apartments alongside £9m of investment in infrastructure and public realm. Phase 2, completed in 2011, is a 123,000 sq ft office building for Wakefield Council.
St Paul’s Square, Liverpool, £120m
Completed in 2011, this scheme is a business quarter centred on Old Hall Street and Pall Mall across three acres next to the new central business district. Included are five buildings delivering 367,000 sq ft of offices and 50 apartments built across three phases.
Millbay, Plymouth, £265m
This scheme has been delivered over three phases and comprises more than 400 homes, new businesses, the 1,000-pupil Plymouth School of Creative Arts and the 171-berth King Point Marina and restaurant.
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