The first generation of New Towns were required to borrow only from HM Treasury on 60 year fixed rate loans. Low interest rates meant that New Towns were so successful financially that they became net lenders to other public authorities. However, increased interest rates proved to be a financial burden for the third generation of New Towns in the 1970s and 1980’s. Whilst the cost of Government borrowing is currently at an all-time low the spectre of increasing public sector debt is not an attractive proposition in the light of the Government’s drive for deficit reduction.
Major housing sites can be identified, be given a designation and planning but more often than not the greatest challenge will be financing the required infrastructure. Traditional market approaches are unlikely to be holistic but rather tend to involve sequential site development. Developers are unlikely to have the appetite to gear up their balance sheets significantly to fund strategic infrastructure in circumstances where the anticipated returns are “slow burn” in nature.
Financial solutions in today’s public sector financial climate need to be sparing of public funding with a greater dependency on private finance whilst so far as possible avoiding the sequential approach mentioned previously.
So what financial tools are available and do any of these tools need sharpening?
Available tools include, capture of value uplift, government financial transaction capital, local authority prudential borrowing, revolving infrastructure funds, growth in local taxes, registered provider funding, development finance, long term institutional finance and Government guarantees. These financial tools resemble individual pieces in a jigsaw puzzle which need refined interlinking to deliver the completed puzzle. There are a number of factors which will determine which tools to use and one of the most relevant will be scale. For example, for medium size developments local authorities have a recent track record in delivering long term developments through forming joint ventures with private sector partners using their landholdings as an investment tool alongside private sector capital
So how can initial development be achieved?
The equity in the acquired land would be held by the entity established to oversee the delivery of the settlement and be used to raise finance to fund initial infrastructure (such an entity is likely to be established along Localism principles with appointments to it by the local authority but representing different residential, business and community stakeholders, not unlike perhaps the approach taken on LEPs). This entity would then procure master planning, commercial expertise and equity finance (the latter to be invested in a joint venture alongside public sector land equity). A revolving infrastructure fund could be established (perhaps within the joint venture) comprising ring fenced debt funding repaid from completed developments and reinvested further infrastructure.
Private finance could be supported by HM Treasury recoverable financial transaction capital (which does not count toward public sector debt) in a similar fashion to that managed by the HCA within the Large Sites Infrastructure Fund. The local authority could also support investment by using its prudential borrowing powers, for example, working alongside the settlement joint venture by funding a market rent vehicle (several local authorities are currently doing this).
So can we tap into long term finance?
The initial equity would establish the “investment snowball” which, once rolling, will accumulate additional investment as it “rolls” across the proposed settlement. However, it is important that the snowball accumulates the “right sort of snow”. The financial structure should allow for more expensive short term funding to be replaced with cheaper long term debt funding. Institutional funders will be the primary source of long term funding, refinancing equity and bank finance. The aim would be to establish long term cash flows to be used to fund long debt repayments. Early planning of the financial and legal structure is needed which is likely to be underpinned by leases to generate income through rents and overage/profit shares. Traditional means of providing assets for public services will need to be re-jigged to create cash flows. Also the potential of registered providers should not be underestimated as their orientation towards long term funding and returns could make them a key group of potential development partners.
Cash flows which could service long term debt include, rents from letting social infrastructure (although economic infrastructure could also be investigated) to the relevant public service providers, rents from commercial lettings, market (PRS) and affordable rents from residential lettings, business rate retention (the Government has announced proposals to enable local authorities to retain 100% of increased business rates, a new settlement could be akin to a current Enterprise Zone) and New Homes Bonus. The Government could help secure long term funding (particularly during early years) and at a cheaper cost by providing a guarantee (albeit necessarily on commercial terms).