Risk capital is the key to unlocking sites

Despite the lack of housing being categorised as a national emergency, the pace of development on many sites is frustratingly slow.

Right now there are more than 100 large, complex regeneration sites in the UK, which combined will deliver hundreds of thousands of new homes.

Part of the hold-up is funding. Large regeneration projects often require risk capital to unlock sites; it takes a higher risk and paves the way for low-risk money seeking safe harbour and as close to a guaranteed return as is possible.

Examples of risk capital are funding to enable infrastructure, the first speculative office block or residential building on a regeneration site.

The debate has been whether to use public or institutional private money to finance regeneration projects. But this is a specious argument.

Public officials use finance options like the Public Works Loan Board when a project has limited risk and can provide a steady return. This is to ensure prudential responsibility and to protect against future political or reputational blow-back should the project go wrong. Institutional funds also favour projects that are relatively risk-free and provide a guaranteed return, as they require stable investments to mirror their liabilities. The rationales may be different, but the results are remarkably similar.

This leaves a gap in the financing market which is causing difficulty in many large-scale regeneration projects. Often the first investment in a large regeneration project incurs greater risk than a local authority finance director or institutional investment director is willing to accept.

The cost of remediating brownfield land and sinking infrastructure across a large site is inherently risky. Revenues are only recovered if house builders buy the newly-prepared land and build houses. The cost of building a new, totemic office building on a speculative basis is inherently risky as the costs will only be recovered if tenants sign leases. These projects act as the ‘ground stake’. They provide an anchor for further investment – whether sourced from the public or private sector.

What is required for these ground stake projects is regeneration risk capital. It seeks to fully understand the risks inherent in a ground stake project – construction, operational, commercial or financial risk – and to then provide the capital at a cost that is commensurate to that risk.

It is inevitable the cost of regeneration risk capital will be higher than public sector or traditional institutional finance. But public sector and traditional institutional finance are unlikely to invest in these ground stake projects in the first place.

The challenge is that there is no central, transparent source of market for this sort of capital. The greater availability of risk capital would allow scores of regeneration projects to commence construction and provide not just the housing and employment space many require, but also the standing assets more risk-averse investors like institutional investors and local authorities require. It’s time for a solution to that challenge.

Caroline Haynes, partner, Estates and Infrastructure Exchange