There is more opportunity for investment in the city regions than ever before.
This has been driven by political change as well as structural adjustment in financial and property markets.
Bank retrenchment from senior lending has created an opportunity for private sector capital, while government indebtedness at both central and local levels (£1,720bn in total) has created a further funding gap.
The role of the private sector has become increasingly important, but solutions are 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 think in a joined-up way about retail, office and industrial in isolation. Mixed-use communities are a more useful catalyst for sustainable growth, where spaces for employment, amenities and residential effectively co-exist.
We also need to consider the totality of the built environment, including the infrastructure needed: be it education, healthcare or economic infrastructure such as transportation, utilities, waste and energy. A ‘real assets’ approach is needed, rather than one based on real estate.
For example, our investment in Leeds has reached well over £600m in the past few years, helping to facilitate major urban regeneration projects and the delivery of housing, social care and infrastructure.
Investments include the redevelopment of the Emerald Headingley cricket stadium; construction of a city centre build-to-rent scheme; our modular housing factory and the Thorpe Park Leeds scheme; and the construction of the first section of the East Leeds Orbital Road. 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 a mayor who has the wherewithal to unlock sites, unblock stalled schemes and become a figurehead to attract further capital from the UK and internationally.
Thinking beyond sector silos is crucial when delivering growth
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 that offer regeneration opportunities and therefore longer-term upside at the cost of shorter-term risk. These will suit different sources of capital.
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. For 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 direct investment opportunity and also adds the missing ingredients for longer-term economic growth. This will benefit the local population but also, in time, feed back into direct investment returns.
The future may be bright for investment in the regions, but strategies for growth still need to be distinct.