Will the economic slowdown impact on the planned regeneration of the Thames Gateway region?

13/11/2008

By Richard Ellard, Partner in Commercial Property & Development. Featured in Legal Week.

For a number of years the Thames Gateway has been described by the Government as Europe's largest regeneration programme, with a Government commitment to investing over £9 billion. The Thames Gateway Delivery Plan states “the success of the Gateway is key to the wider UK economy and ensuring that London remains a global capital”. 

The plan has ambitious construction targets and spending commitments which were made before the current economic turmoil. What will be the impact of the economic slowdown on the Thames Gateway regeneration project? 

The Thames Gateway – what is it?

The Thames Gateway is in fact a number of separate regeneration projects within a 40 mile area from Canary Wharf in London to Southend in Essex and to Sittingbourne in Kent. Some of the key objectives of the regeneration plan are to create 225,000 news jobs and to build 160,000 good quality new homes. 

Achievements so far include the new high speed international and domestic rail line at Ebbsfleet and a £1.5 billion project for a new container port and logistic park in South Essex. 

An example of the size of the project is the Land Securities scheme at Ebbsfleet Valley. Situated close to the new Ebbsfleet International railway station, Ebbsfleet Valley will accommodate 9500 new homes. It is projected that 25,000 new jobs will be created by this project alone over the next 15 years. In July this year, planning permission was granted for one phase called Northfleet Rise which in itself will provide 1.7 million sq ft of development which will include commercial development and in the region of 464 new homes. 

South East property market

Over the past 15 years or so the property market in the South East has been booming. Some of the largest increases in land value, rents and house prices outside of London have occurred in the South East. Although some of the towns within the Thames Gateway have significant economic and social challenges (otherwise there would be no need for regeneration!) even these areas have benefited. House prices in Gravesend were rising in 2007 by 11.6% per year - just ahead of the Kent average. 

But what now? I have spoken to agents across the Thames and the message is the same – the investment market has albeit completely dried up, land values are falling and the housing market is stagnant. The rental sector is less predictable but generally leases are getting shorter, tenant breaks are common, rental levels are flat and demand is low. These messages reveal the reality that the property boom is over. 

Will the regeneration stop?

Will the slow down in the economy and the property market stall the regeneration plans in the Thames Gateway area? 

I asked for the view of David Liston-Jones, the Chief Executive of the Thames Gateway Kent Partnership. He commented: 

"The credit crunch will clearly impact on businesses and communities everywhere, and the Thames Gateway cannot expect to escape from its effects. But the massive public investment which has gone in to the area in recent years, and which will continue in the future, will help us. And it's important to recognize that the Thames Gateway is a long term endeavour. Over the coming years there will be periods of slowdown and periods of faster growth, but the focus will remain on delivering the Thames Gateway programme and on creating a new and sustainable economy in the area.” 

Taking the long term view is the key message. Some of the large projects will take 20 years or more to complete. It is likely that we will go through a number of economic cycles during such a long development programme. 

Similar sentiments were echoed by the regeneration bodies Swale Forward, Kent Thameside Regeneration Partnership, Medway Renaissance and SEEDA. 

Flexible structures

Swale Borough Council is currently undertaking master planning for the major regeneration of Sittingbourne town centre. The scheme will be mixed use and is valued at £500 million. The project is in its early phases and I asked whether the current economic climate would impact on the Council's aims and objectives. The answer is that the long term goal of the regeneration of Sittingbourne town centre will not change. What will change is how the Council achieves this objective. For example, rather than build residential flats in the first phase these may follow in a later phase, the assumption being that demand picks up further into the development programme. The Council may have to structure the project to ease cash flow by sharing the up front risk in return for taking a larger share in the development profits going forward. 

SEEDA

I also discussed the current economic slowdown and the property market with SEEDA. The Regional Development Agencies (RDAs) have recently seen £300 million cut from budgets. The RDA's have not stated how this will impact on the projects they are involved in but it is clear that there will be some tough funding choices in the future. SEEDA did comment that it will be looking to access for European funding in the future for specific projects. 

Aside from its funding concerns SEEDA is taking a commercial approach to projects. Whilst SEEDA is accountable to the tax payer, there is no share price to worry about which assists the RDA's in striving for another of their key objectives – to facilitate regeneration. Therefore, the RDA's can structure land deals so that they remove unacceptable risks by dealing with land remediation and infrastructure issues and/or getting paid later in the process. 

Infrastructure and public projects

Much has been made of the Government continuing with major infrastructure works to keep the construction industry going. For example, in North Kent SEEDA has been involved with a £5 million infrastructure project in Queensborough and Rushenden. The new road will open up a large part of the land for development in the future. 

Medway Renaissance confirmed that they continue to invest in infrastructure and public projects. They are working on the design, planning and infrastructure elements for a number of schemes. 

There are a large number of both private and public sector infrastructure projects in Kent Thameside including: 

£74 million in the £185 million Kent Thameside Strategic Transport Infrastructure programme, in which Land Securities are also investing £40 million over the next 12 years.

£10 million for the refurbishment of Dartford and Northfleet Stations and the installation of a pedestrian link between Northfleet Station and Ebbsfleet International.

The future

The next couple of years will be characterised by developers only carrying out work they are contractually obliged to do. All those development agreements, conditional contracts or option agreements may find their way to litigation departments to check the meaning of “Acceptable Planning Permission”. There is evidence that some developers are trying to renegotiate deals in terms of price and structure. 

If house prices continue to fall then developers are unlikely to want to buy land or build properties. There is a risk that the Thames Gateway may end up with fantastic infrastructure but very little development activity. If the industry slows down too much then there is a worry as to how long it will take to gear up again when the economy does turn. 

One message that came across from SEEDA and Medway Renaissance is that the integrity of developments will not suffer despite current market conditions. Matters such as sustainability and design will not be ignored just to get properties built. There is enough confidence in the brand of the Thames Gateway and the long term objectives of these agencies to hold firm on this point.