Public Sector property after the virus
A reflection by Trowers & Hamlins Real Estate Partner, Chris Plumley.
When I was originally asked to draft this article it was before we knew the full extent of the disruption Covid-19 would have on our lives and the communities we serve. Clearly some sections of the property industry are going to be hit heavily and we have already seen an impact on the investment, housing and retail sectors. This makes it all the more important that the public sector keep going, adapt rather than stall projects during this public crisis. So here are some of the early trends we are seeing and some thoughts about what the picture might look like in the coming months.
Emergency shelter
Local authorities provide a critical front line service. We have seen a number of development projects, such as student accommodation blocks, be converted into temporary homeless shelters. People living in hostels are often in dormitory shared space. That creates a significant virus safety risk and so if council's can find single occupancy provision that is much safer and allows social distancing. As hotels and B&B's aren't available using, now under occupied, student accommodation can be a viable alternative.
Housing projects
The need for good quality and affordable housing doesn’t abate and councils, housing associations and Combined Authorities are still pressing ahead with housing development projects. Whether these are procured schemes or partnerships developed as non-contracting authority vehicles the need for housing delivery goes on. Where projects are in the middle of competitive dialogues, for example, we are seeing them go ahead with virtual meetings, revised timings and an acknowledgement that bidders may be encountering staffing shortages. For non-procured schemes I would expect a pause period whilst land values are reassessed or while funders consolidate and take stock.
The Government has moved to ensure that planning committees can continue to make decisions by way of virtual meetings. This will greatly help the development market to keep going and housing delivery targets stay on track. At the time of writing the Secretary of State is still encouraging physical construction to continue.
Long term projects
Public sector place shaping, infrastructure building and large scale regeneration seems set to continue. Regeneration has always been a by-word for the public sector stepping in to address market failure. That kind of intervention requires a long term view and a critical delivery path spread over years. Projects such as UK Central Hub and HS2, housing delivery partnership, town centre developments, Town's Fund and Future High Streets Fund projects and large scale mixed use pre-development infrastructure projects will mainly proceed.
After the crisis
So why might the public sector emerge from this crisis differently to the private. Public sector property work is often counter-cyclical or market immune and here are some reasons for that.
- Public sector projects often benefit from and take advantage of patient funding streams. Unlike some purely private sector developers who need cash flow financial return, the public sector has the ability and sometimes necessity for long term funding partners. This can be through private funding of local authority self financing via PWLB, LEP, CA or the increasing number of central government funding pots such as the Town's Fund or the Future High Street fund.
- Councils are increasingly looking for outputs other than financial. With the inevitable changes likely to come to the Green Book councils are evaluating schemes differently. The social impact of schemes will become an ever more important part of projects. This in turn will encourage councils to look at models for inclusive growth, increased social capital and higher quality schemes than ones which have a purely appraisal driven design.
- Council's maintenance programmes are likely to be impacted. The requirement for maintenance continues but contracting companies are showing increased level of sickness and furloughed staff. This means programmes are likely to become backed up. Where there are statutory obligations councils should start planning now to meeting those obligations.
- PWLB. The trend for councils using PWLB for commercial property investment has come under scrutiny from many viewpoints. Is it the right type of investment? Are the risk profiles understood? Is that a market distortion and the right use of public sector money? Is it just a modern way to investment in place? Once we know the details of the Chancellor's proposed curtailment in this field we will no doubt see new ways to use PWLB to keep that line of funding alive.
- There has always been a potential tension of having short term political cycles impact on long term property projects. The flagship scheme of one administration can so easily be brought down by opposition groups in marginal administrations. On the one hand the impact of BREXIT is still to be seen so it will be some time before that properly influences local decision making. On the other hand with local elections postponed and a period of stable national government we may see less political impact on deals.
- Most Combined Authorities are also now firmly established and working well. This means major infrastructure and property projects should stay on track. The funding provided by CA's for many projects is already allocated and so that viability and land supply assistance will have a positive impact.
- More consultation. This reflective period may see greater influence of local communities in development work. Already good quality developments benefit from early engagement with the impacted community. The evidence shows that where schemes are imposed they perform less well than where collective wisdom around local needs are considered up front. This also links into the idea of development's profitability having time to mature. The public sector's response to large scale flooding may also heavily feature in such consultations.
- There has been a move over recent years for increased commercialisation of councils. This initially meant a raft of new trading vehicles being set up but not every council knew how best to use them. As that ideological change has evolved some councils have developed really good business models so that the trading and partnering vehicles are producing longer term sustainable revenue. As revenue will be more important than capital we will see more of these schemes.
- Behaviour. Even before the crisis I had noticed a growing trend towards real collaboration in property transactions. I wonder if, after the current crisis, there will be a reflection on the need for people to work more closely, value contributions and be clearer about the collective need rather than those of individual entities. Better collaboration also make better business sense and tends to lead to higher quality schemes.
So whilst the Covid-19 crisis has hit us all very hard the public sector is likely to be at the forefront of the recovery period. As we emerge from home working and go back to something resembling normality we might just dare to be optimistic about the road ahead.
Originally published by the Association of Chief Estate Surveyors