At the beginning of March, Liverpool City’s Budget Council will vote whether to proceed with a proposed £90m of cuts and implement a 4.99% council tax rise. Harsh certainly, but according to mayor Joe Anderson the reductions would be more severe if it weren’t for the City’s Invest to Earn programme, which is generating £3m pa, and its housing investment programme, which brings an additional £8m pa council tax.
The need for extra income streams is stark when you compare Liverpool’s council tax income of £127m with adult social care outgoings alone amounting to £170m for the same period.
It has generated extra income through direct income-producing investments and through wider economic development programmes. The £66m Liverpool Exhibition Centre and the adjoining £24m Pullman Hotel were funded by the council. The LEC brought in record turnover over 2016 of £17.2m and produced income to the city of £128m and £500,000 in new business rates.
Liverpool is by no means alone in having budget cuts. The Institute for Fiscal Studies says that in 2016, excluding grants for education, police and fire services, English councils’ total revenue was £44bn – a 26% drop on 2010. And as an authority’s ability to cut certain services is restricted, non-secured services – such as economic development – have been hit hardest. The IFS says that spending on planning and development has almost halved to £1.5bn since 2010.
So when then chancellor George Osborne told the local authorities in 2015, “Grow your area, and you’ll grow your revenue too,” councils took it to heart and are now adopting new roles and instigating capital projects to bring about regeneration and economic growth whilst producing new income streams.
Dr Steve Norris, head of planning and development at Carter Jonas, says: “Traditional funding models that relied on the private sector driving development and regeneration have been scrapped. It’s now incumbent on local authorities to take the lead.”
There is a focus on providing infrastructure and physical development including delivering super-fast broadband, enterprise zones, bringing forward major development sites; opening up employment land and town centre regeneration.
Councils’ involvement in regeneration isn’t completely new but Stephen Miles, partner, development and planning at Cushman & Wakefield, says there is a greater appetite from councils to take developer/investor risk.
“Traditionally, public sector intervention revolved around infrastructure and site enabling. Now there is an increased desire to intervene directly to ensure delivery.”
For instance, Leicester City Council lent £4m to Infrastructure Investments, at commercial rates, to bring about the refurbishment of 35,000 sq ft of unoccupied office space at St George’s Tower. This allowed the tenant, Hastings Insurance, to remain in the city and expand its work force by 500 staff.
The trailblazer for the local authorities taking the lead came from Europe in 2007 with the launch of Jessica (Joint European Support for Sustainable Investment in City Areas) supporting urban development and regeneration.
George Richards, director at CBRE, explains these financial packages for regeneration projects lent – not granted – capital on a ‘recycle’ basis, so a spiral effect of income creation would evolve.
A pioneer of Jessica is the North West Evergreen Fund, a conglomeration of 16 local authorities managed by CBRE, which provides debt funding for commercial property and regeneration projects in the region at competitive commercial rates.
Andrew Antoniades, senior director at CBRE, says Evergreen showed the way by moving in where the banks would not. But the results have justified the value of taking risks.
“The original £30m fund should eventually be producing around £1bn of GVA. The original £10m lent for Spinningfields alone has produced a £120m value development.”
Councils are also stepping in to help take some of the risk out of speculative office development for the private sector. Leeds City Council took a ‘put and call’ option over several buildings in the Leeds City Region Enterprise Zone. This gives developers certainty via a guaranteed exit as the council assures the developer of a minimum sale price in case a building does not let fully.
Antoniades says: “A £10m development may have a fully let value of £14m, so the if the council guarantees £12m, it’s a win-win.”
Miles says that this method has stimulated development activity and catalysed wider development in the Leeds City Region EZ, where council investment helped Muse Developments speculatively build the 80,000 sq ft Logic Leeds in 2015, which the council purchased last year, and likewise Willow’s 80,000 sq ft Kinetic 45.
In the past, the Public Works Loans Board was the main supplier of finance to local authorities. Now easier and better access to funding is helping councils provide the kickstart for development.
Shifa Mustafa, executive director of Croydon Council, says: “Croydon was previously reliant on the public sector capital programme but now has many more options.”
The borough has established a Revolving Investment Fund to support and accelerate development of strategic sites and is also funding critical infrastructure through a Designated Growth Zone – a partnership between government, GLA, TfL and Croydon to finance and deliver projects essential for town centre growth. The council can borrow up to £300m to be repaid over 25 years, through retaining 50% of growth in business rates.
Earlier this year Warrington Borough Council entered into a jv with Acorn Financial Partners to establish the Redwood Bank in the town. The council reckons its £30m investment will equate to lending of £150m to support the growth of local business and to increase council revenues from successful development projects.
There are of course risks involved with council’s getting more directly involved with development and regeneration. Research on economic growth prospects from the Joseph Rowntree Foundation found that 10 of 12 cities ranked highest for relative decline were in the north of England, for example. And research from the Public Accounts Committee found that the government has inadequate information to make informed decisions on the nature and extent of councils’ commercial activities.
It says: “We are concerned that the department appears complacent about the risks to local authority finances arising from the increasing scale and changing character of commercial activities across the sector.”
But CBRE’s Richards says: “The crux of the matter is that local authorities can now provide their own solutions to their own problems. They can use their assets, powers and funds to unlock potential.”
Brexit
CEDOS, the body for public sector economic development professionals, found 76% of its members refer to the EU for some form of funding for economic development. There is doubt about the long term effects, but Brexit has caused short-term consternation. Croydon Council’s Mustafa says: “Immediately we can no longer borrow from the European Investment Bank. There will be more impact on the confidence of the commercial sector given the uncertainty it has caused.”
And this lack of confidence is seen as a stimulus for local authorities to act. Leslie Jones managing director James Cons says: “Post-Brexit, private investment is becoming more cautious, meaning the drive from local authorities is increasingly paramount. Councils’ access to funding means they must provide the means and vision for regeneration.”
Cushman & Wakefield’s Stephen Miles says: “The added caution in the development markets is reinforcing the public sector’s attitude in terms of the need for intervention.”
But there is a Brexit fall out issue that could have far bigger implications on economic development than money: staff. Mustafa says: “We are aware of the potential impact on our ability to secure labour for key activities, e.g. construction.”
Case study – Basingstoke
With its £25m Invest to Grow Fund, Basingstoke and Deane Borough Council is one of the first local authorities in the country to establish its own local level property financing outlet. As part of a £4bn regeneration programme the fund, which is advised by CBRE Indirect Investment Services, will provide debt and equity finance up to £7.5m for a range of commercial property, regeneration and infrastructure projects, with all capital being reinvested back into supporting other local growth projects.
George Richards of CBRE’s investment advisory says the loans, which will be at competitive market rates, will be used to propel development projects. He says that unlike many lenders, the IGF can take a wider view of proposals and consider what will be of benefit to town’s wider prosperity and stimulate further growth.
“The fund can give money to projects which banks may not consider. It can look at innovation and growth prospects. It is a question of finding the right balance between risk and reward,” he says.
The fund is aligned with Basingstoke’s Economic Masterplan 2033, which aims to achieve 4,000 new jobs, an additional £233m GVA pa and 13,400 new homes.
Richards says: “The targets for the fund are all about the outputs. The leverage criteria drives the investment strategy.”
And to keep the momentum, the target repayment is a maximum of three years for debt investments, but they would expect funds to be recycled quicker than this so there are reinvested as soon as possible.
Richard’s says the fund is looking at around three times recycling of capital, achieving a minimum of £200m and up to £0.5bn development value over 10 years.
The council is also investing £30m in property projects rather than treasury investments, and there are plans for 3,200 new homes as part of the government’s Garden Towns initiative.
Basingstoke is funding the project through its reserves, so it will make a profit from interest, and from capital growth if any equity investments rise in value. It will in turn make extra revenue from the business rates created and general rises in economic prosperity and spending from new jobs.
Basingstoke is an affluent, strategically located town with cash to fund this investment model, but could it be replicated successfully somewhere without those attributes?
Andrew Antoniades, senior director at CBRE, believes so: “It needs to be of a sufficient scale and suitability for the location. And the potential for partnerships to benefit from each others assets and remove competition is useful. But they are obliged to ensure the space is built to create growth.”
