"There is a debate happening now in the offices of many London boroughs. It can be summarised along these lines: we have the land, we have the vision, we have the need - do we crack on ourselves or sell land to the highest bidder and bank the receipt…or is there another way?
Many teams are using the services of specialist advisors to answer this very question.
In the past, it was normal for public bodies to sell off surplus land, typically on an open market basis with the party who paid the most on an unconditional (risk free) basis securing the site.
Unsurprisingly, eyebrows were raised by developers making large profits on these sites when planning permission was secured and even more when built out.
So, not unsurprisingly, many regeneration teams began thinking…….if they can do it, so can we, so let’s do it ourselves and keep their margins. So does the in-house team adopting the role of developer represent best value?
Ignore the hype – development is a rollercoaster ride
Development is a high risk activity. Only a few years ago, several big players came close to going out of business. Many smaller ones did. As the market collapsed, jobs went, projects stagnated and banks promised never to lend to the sector in the same way.
The market has since picked up, in London especially, and many developers are benefitting as a result. Good times don’t last forever though and everyone knows it is a cyclical activity. When times are good they can be very good. When they are bad it can be catastrophic.
Developers are not the only beneficiaries though, as new development tends to improve a local area and acts as a catalyst for wider economic gain, delivering regeneration with far-reaching impact for job creating and place making.
Perhaps the real questions for local authorities are whether it is worth the risk and, if so, can and should they do it alone.
Not as straight-forward
While selling land on an unconditional basis may not be best value, being an in-house developer also brings challenges. If major PLC developers get it wrong – and they do – then someone who doesn’t specialise in the sector is taking a gamble.
A financial appraisal showing a healthy profit margin is just a theoretical assessment; with rising costs, uncertainty in the wider economy, and a construction skills shortage, there are huge risks with plenty of pitfalls. It is also exceptionally resource intensive and requires a large experienced team with specialist skills. London boroughs must take off the rose tinted glasses when assessing whether the in-house approach is correct.
Yet, what are the alternatives? There is a middle ground. There is a growing debate about the role of a seasoned development partner who already has the necessary resources and expertise (no offence to consultants but someone who is responsible when things start to wobble and will make decisions to keep things on track). The structure can then be tailored to suit each individual circumstances and each party’s attitude towards risk and reward.
The development partner will need a reasonable return (alarm bells should be ringing if this is not the case) for them to fully engage as a genuine partner. To coin a well-used phrase, you get what you pay for. The outcome of this middle ground: piggy backing on someone else whilst limiting exposure, controlling what is built and getting a healthy share of the profit.
Does this sound like a debate you are having now? I’d be happy to share my experiences with you – drop me a line here."
Gregor Mitchell is land director at Be:here, Willmott Dixon' PRS company