28 Nov 2017
Total Investment in City Regions: The way ahead
There is more opportunity for investment in these city regions than ever before. Bill Hughes, Head of LGIM Real Assets points to this week’s Autumn Budget and the positive changes that will back the Northern Powerhouse, the Midlands Engine and elected mayors across the UK.
Looking firstly at the structural. Bank retrenchment from senior lending has created an opportunity for private sector capital, while government indebtedness at both a central and local level (£1,720 billion in total) has created a further funding gap. The role of the private sector has become increasingly important, but it is not one size fits all. At Legal & General we use the term “slow money”, which illustrates that a lower cost of capital, unencumbered by one or three year relative return targets, can make a real difference to development viability.
The property industry is also thinking beyond sector silos and this is crucial when delivering regenerative growth at scale. It is impossible to be strategic or joined up thinking about retail, office and industrial in isolation; mixed use communities are a more useful catalyst for sustainable growth; where employment space, amenity space and residential space effectively coexist.
We also need to consider the totality of the built environment that affects the local population, including the infrastructure society needs: be it education, healthcare or economic infrastructure such as transportation, utilities, waste and energy. A true “Real Assets” approach is needed, rather than one based on real estate.
By way of an example, our investment into Leeds has reached well over £600 million over the last few years, helping to facilitate major urban regeneration projects and the delivery of housing, social care and infrastructure. Investments include the redevelopment of Headingley Cricket Stadium (left), the construction of a city centre Build-to-Rent scheme, our modular housing factory, and our Thorpe Park Leeds scheme, which includes unlocking thousands of much needed homes and the construction of the first section of the East Leeds Orbital Road, a key piece of road infrastructure. We have also invested in major retail and leisure backed schemes.
This interest in a broad range of assets is both rewarding commercially but also consistent with the approach of progressive local government. And politically, the landscape is becoming more exciting and receptive to long term inward investment. The devolution of city regions will create a new system of governance. It is important that these are delineated logically by geography as coherent classifications, based on where people live, in order to become important policy decision making areas. In many cases they will be fronted by an accountable leader in the form of a Mayor, with the wherewithal to unlock sites, unblock stalled schemes and become a figurehead to attract further capital from the UK and internationally.
There is therefore a new opportunity being offered by devolution. But it does need to correspond to investors’ understanding of geography. Spreading boundaries too diffusely will confuse and dilute potential, especially when seeking international capital; investors need to be sure what they are investing in – and where.
Investors will also need to separate areas that offer stable, conventional income and ones which offer regeneration opportunities and therefore longer term upside at the cost of shorter term risk. These will suit different sources of – and costs of – capital, sometimes from within the same firm.
Understanding what will drive future growth and identifying the gaps in a city’s offer that real asset investment can fill will also be crucial. By way of an example, many good university towns lose graduates to other cities and their economies subsequently underperform. Understanding how investment can alleviate that by delivering the right employment space creates both direct investment opportunity and also adds the missing ingredients for longer term economic growth. This will benefit the local populous but also, in time, feed back into direct investment returns.
The future may be bright, but strategies still need to be distinct.