That sinking feeling - funding estate regeneration

Council Estate SinkingThe prime minister’s announcement concerning the future of so-called ‘sink estates’ leaves no doubt about this government’s aspiration to tackle the regeneration of many of the country’s housing estates.

Tonia Secker, partner in the housing and regeneration department at Trowers and Hamlins LLP, considers the government’s ambitious statement and the range of funding options available to bring the vision to fruition.

How is this large-scale regeneration set to be funded?

Beyond a commitment to create a £140m fund to ‘jump start’ regeneration projects via pump-priming planning, decanting and early construction costs, detailed proposals for funding the regeneration plans are scarce. It is anticipated that the newly announced Estates Regeneration Advisory Panel will work with authorities and residents to create bespoke regeneration plans. Funding packages will need to be equally bespoke.

Set against the background of local authority cuts, how can local authorities fund such ambitious projects?

Regeneration is a costly exercise. The ability of local authorities unilaterally to fund projects of this nature is in doubt—particularly given real term reductions on rental returns and limitations on available headroom within their Housing Revenue Accounts. Regeneration of the type contemplated by government is only likely to be viable if external investment, private finance and any available capital subsidies are combined with a local authority’s own resources and land.

Local authorities will no doubt contemplate the creation of both wholly owned subsidiaries and/or joint ventures with the private sector as well as development agreement arrangements to take such initiatives forward. In terms of the option selected, much will depend on the authority’s aspirations for the regenerated estate, planning and site limitations, promises made to residents at the outset in terms of rehousing on- or off-site, the nature of the accommodation that is being reprovided and where long-term ownership of the estate will sit.

To the extent that subsidiary or corporate joint venture arrangements are contemplated (giving the authority a long-term interest in the ownership of the estate), we would expect authorities to consider the use of their land as equity into the vehicle, deferred purchase arrangements, the potential for Public Works Loan Board on-lending to the vehicle with or without external finance (as senior debt) as well as potential contributions from the Homes and Communities Agency’s or Greater London Authority’s capital programmes. Their compulsory purchase order and stopping-up powers and ability to facilitate decant should also assist project viability. The existence of one or more joint venture partners would obviously be of fundamental benefit to the overall financing of the project both in terms of risk and cost sharing, but will dilute the level of influence and return that the local authority will derive from the project. It may also restrict some of the desirable community benefits on a regeneration project in favour of facilitating profit-generating cross subsidising private residential accommodation.

In addition, in order to generate the levels of investment necessary to deliver estate regeneration, intensification and diversification of land use and tenure is likely to be required. This does mean that substantial regeneration is likely to be more viable in areas where land values are high in order to deliver subsidy to the project. Depending on the nature of the regeneration, diversification of land use and increased densities may be capable of being utilised to derive ongoing revenue returns to the authority through the retention, for example, of commercial units and incorporation of additional private residential accommodation.

The alternative is for local authorities to seek regeneration and renewal of their estates exclusively through the private and registered provider sector—such arrangements would typically involve the transfer either of the tenanted estate to a registered provider for value but subject to a tenants’ ballot and redevelopment obligations or the disposal of land to the private sector on a vacant possession basis in return for reprovision of affordable units to which the local authority has nomination rights. In these cases, regeneration is achieved but the local authority will typically lose direct future involvement in the regenerated estate and may surrender some control over the delivery of the new accommodation.

What are the challenges when utilising private finance or investment in such schemes and regeneration?

Regeneration schemes are long-term projects with the capacity to run for 10 to 15 years or more. Any project with such a long duration is susceptible to a range of risks ranging from deteriorating national and local economic circumstances, policy changes, change of political control, market failure, contractor longevity and judicial review.

Finance providers will want to be insulated from resulting risks and local authorities should expect to be pushed for flexibility within the development arrangements should those risks materialise—typical areas for discussion will surround:

  • tenure reconfiguration to deal with market downturn
  • funder step in
  • recovery of investment on developer or authority default, and
  • renegotiation of the financial model with consequential implications for the project outputs

Equally, funders and investors take comfort from the strength of the local authority covenant. To the extent that is diluted, for example, through the use of a subsidiary or a joint venture vehicle, then the funder will typically look to the local authority for a guarantee—whether of funds or performance—requiring the local authority to look closely at its appetite for risk and its vires.

Institutional investment is becoming more readily available, but such investors may well look for a greater level of project advancement (in terms of land assembly, developer procurement and planning) than conventional funders before they will commit to lending.

Have there been any examples in the recent history that offer lessons for local authorities?

Large-scale estate regeneration has been off the agenda for a number of years, but the importance of proper and effective resident consultation cannot be understated. Judicial review and other forms of local political challenge—as exemplified in the recent judgment in Bokrosova v Lambeth London Borough [2015] EWHC 3386 (Admin), [2015] All ER (D) 206 (Nov)—have the capacity to derail even the best regeneration proposals and significantly increase project costs.

Interviewed by Susan Ghaiwal.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Filed Under: Property

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