W11P163

Property-led Regeneration and the Financialisation of Council Estates in Inner London Task 1: Essay

By Shahin Noor

The Heygate Estate

Page | 1

Contents Introduction .............................................................................................................................................. 3 Context .................................................................................................................................................... 4 Property-led Regeneration for whom? .................................................................................................... 7 Awakening the Elephant’s Estate.......................................................................................................... 7 The Impacts of Financialisation of Council Estates .............................................................................. 8

Page | 2

Introduction Successive governments from Thatcher to May have viewed the ‘revitalisation and urban regeneration of British council estates’ as something that ‘benefits’ and creates value for the whole of society (Perera, 2019:8). Urban regeneration is defined as a process which involves the revamp, revitalisation, renewal and redevelopment of urban areas. Through transforming areas of economic, social, and environmental decline, urban regeneration interventions aim to create value (Roberts, 2000). As such, this paper critically assesses one key urban regeneration strategy, ‘property-led’ regeneration, drawing on the example of the Heygate Estate in the London Borough of Southwark.

Lessons can be drawn from the Heygate Estate as there are currently 170 council estates are either undergoing or subject to consultations over demolition due to the conservative governments Estates Regeneration scheme. The estate has also received a great deal of coverage in media, and academia on debates related to gentrification and displacement, hence, why this paper aims to shed light on who benefits and loses in property-led regeneration schemes.

To do so, the paper is structured in a coherent manner. The paper begins by explaining the key drivers involved providing an overview of the development. Next the paper examines the monetary and nonmonetary gains and losses for developers, communities, and state authorities. At the same time, the paper assesses the financialisation of property developments and the distribution of risks amongst stakeholders directly and indirectly involved in the development. The paper draws to a close summarising the strengths and weaknesses with concluding remarks on property-led regeneration.

Page | 3

Context The Heygate Estate lies within the wider ‘Elephant Park’ (figure 1) a £3billion regeneration project on the south bank of the River Thames to be completed by 2025. The urban regeneration strategy is ‘property-led’ regeneration. Property-led regeneration can be defined as the ‘assembly of finance, land, building materials, and labour to produce or improve buildings for occupation and investment purposes’ (Turok,1992:18). Property is being constructed in the hope of regenerating the area through attracting people, often highly skilled workers and affluent communities, which is said to ‘boost the economy’ of the region.

Figure 1 - Wider Elephant Park

Figure 2 shows the hierarchy of spatial plans leading to the regeneration of Heygate Estate. The London Plan formulated under the GLA identified Elephant and Castle as an opportunity area where value can be created through regeneration, ‘unlocking’ the areas ‘potential’ to contribute to London’s need for housing, commercial and other development (GLA, 2013:3). One of the key drivers of the development is the need for councils to meet GLA housing targets and in the pursuit to tackle London's housing crisis, council estates have been seen as ‘new land’ and as a resolution to providing ‘affordable housing’ for Londoners (Perera, 2019:16). Southwark Council (SC), the previous landowner of the Heygate and of Page | 4

much of Elephant Park has also been a key driver and facilitator for regeneration. Fred Manson the director of regeneration of SC in 1999 expressed that there was a need for a ‘wider range’ of people to be living in the borough as ‘social housing generates people with low incomes’ and ‘poor school performances’ which all play a part in ‘middle class people staying away’ (Orr, 1999:1).

Figure 2 - Macroscale Plans

In 2002 SC sold the 25acre Heygate Estate to a controversial Australian property developer, Lendlease (Rashbaum, 2012), for £50million, significantly less than other Elephant Park redevelopment sites (Lees and White, 2019). The former estate was home to 3000 people living in 1212 residential units (1033 council-owned and 179 leasehold). The newly built estate will consist of 2500 new homes where more

Page | 5

than 75% will be on the free market. Figure 3 illustrates the development model and the stakeholders involved in the process. Table 4 further describes some of the key inputs and outputs of the project.

Land Interests

Previous Landowner – Southwark Council

Transport for London

Council Planners

New Landowner – Lend Lease

Young local people

Professional consultants

Landowners

Anti-development lobbyists

Building Workers Civic Society

Labour Market

35% Campaign Group Environmental Groups

Land Market

Investment Property Market

Political Market

Foreign Singapore Investors

Energy Suppliers

Southwark Council Political Interests

Developer Organisations

Lendlease

Banks

Financial Interests

Direction of Supply Socially constructed markets

Figure 3 - Structure-Agency Model adapted form Adams and Tiesdell (2013)

Key Inputs

Key Outputs

Purchase of land acquired by Lendlease

New ‘mixed-used’ development

Plans to deliver a Sustainable Energy Plant Zero net carbon emissions strategy Employment Strategy

Job and construction skills creation

Evictions – Compulsory Purchase Order Act Large scale displacement Marketing of development Figure 2 – Inputs and Outputs

Page | 6

Investors

Customer Interests

Energy Market

Financial Market

Regulators

Greater London Authority

Occupiers Leaseholders

Local Communities

Politicians/State Officials

Local Residents

Occupier Market

Foreign investors/investment

E.ON Energy Solution Limited

Property-led Regeneration for whom?

Awakening the Elephant’s Estate Evidence shows that project delivery groups have seen the Heygate property-led regeneration as having a high rate of return and will create a substantial amount of economic, social, and environmental value/benefits for the area and London as a whole. For example, SC has created 433 jobs for Southwark residents, of which 179 residents were previously unemployed, to work on the Lendlease regeneration site. Lendlease promised to pay the London Living Wage to all contractors and subcontractors on the project (Hatts 2013). Moreover, a new Construction Skills Centre will be open to help over 500 local residents per year training them on construction, maintenance and firesafe skills.

Property-led regeneration interventions have an economic impact in the area through creating jobs often on the building grounds of the development or have provided jobs after construction has finished and businesses have moved into the area (Turok, 1999). Through the delivery of mixed-use tenure of housing contributing to the social objectives of social integration, the redevelopment will tackle issues of antisocial behaviour and crime described as ‘positive gentrification’ (Perera, 2019; Provan and Power, 2019). The development has been applauded for providing larger homes, gardens and better facilities which aim to contribute to the overall health and community space (LendLease 2013). Furthermore, one of the strengths of estate is that the wider area of Elephant Park is the only project in the UK to be selected for C40 Climate Positive Development Programme because the development will achieve a net carbon negative after completion, setting an example for future sustainable real estate in London (Addae-Dappah, 2009; SC 2017). An energy hub will deliver a zero-carbon heating to residents through a combined heat power plant (Elephant Park, 2020; SC, 2017). To protect local wildlife, Lend Lease will replant or replace trees that are in Heygate estate and will plant 1,200 new trees (SC, 2013). However, despite project delivery groups applauding the benefits, local groups would strongly claim the losses, risks, and financial costs of the development have not been shared equally.

Page | 7

The Impacts of Financialisation of Council Estates ‘The absence of the state from the building of social housing is wrong’ Local Councillor (Beswick and Penny 2018)

On the other hand, the Heygate Estate development has been characterised as a developer friendly development which has maximised economic value for the private sector overlooking the social experiences of the existing communities. For example, residents described how since the early 2000s the council ‘‘just ran [the estate] down into disrepair’ (Reeve and Steel, 2013), viewing it as an ‘failed’ and crime ridden ‘sink estate’ in order to justify decisions to make way for regeneration through demolishing the estate (Lees, 2014; Lees and Marra, 2016:6). Residents who failed to find alternative housing were evicted and displaced out of the borough (figure 5) (Lees and White 2019). Although a regeneration promise of a ‘Right to Return’ was put in place out of the 1000 secure tenants only 250 signed the agreement and by 2013 only 45 former Heygate council tenants had actually moved back into new homes (Lees and Marra, 2016:8). Furthermore, after the removal of existing tenants, according to Transparency International in 2017, 51 of the new apartments were advertised in Singapore before any British outlets and were all sold to foreign investors (White 2017; Booth 2017). The above suggests that, property-led regeneration is an example of ‘accumulation by dispossession’ (Harvey, 2005). This is because the emergence of capital accumulation leads to the financialisation of property and results in dispossessing the poor of public (state-owned) assets, land and wealth which are then sold off to private ownership. Successive governments have seen the need to intervene in ‘sinking’ estates by ‘creating mixed tenures and incomes’, (as previously shown view is upheld by council members), by exploiting large rent gaps in urban areas which are used to draw back the middle-classes to the city (Hodkinson and Essen, 2015; Perera, 2019:14). What is shown here is the greatest loss has been felt by the communities whilst SC was taking on the responsibility and accountability of the costs (£44million) of removing the existing residents (Figure 6). The council has ensured the security of Lendlease’s investment through taking onboard the financial implications and risks of the development. From the private sector perspective by transferring over the costs of removing the residents makes the redevelopment more attractive for investment (Mcgreal et al., 2000). As such, council estates have become attractive investment due to its ‘low risk profile’ and ‘reliable underwriter (the state)’ (Beswick and Penny, 2018:626). As such, the failure of the council to represent and support its residents is a weakness of the development.

Page | 8

Figure 5 - Displacement Map (Lees et al 2013; London Tenants Federation et al 2014)

Page | 9

• • • • • • • • • • •

Price paid by Lend Lease for 22-acre Heygate Estate site: £55m Price paid for nearby Oakmayne/Tribeca Square 1.5-acre site: £40m Expected total cost to Southwark Council for evicting residents: £65.5m Previous estimate of cost to refurbish Heygate Estate to modern standard: £35m Expected profit from sales for Lend Lease: £194m Expected profit from sales for Southwark Council: £0 Average compensation given to leaseholders of one bedroom flat: £95,480 Average compensation given to leaseholders of four bedroom flats: £177,421 Lowest price unit in new development (one bedroom flat): £310,000 Number of social-rented units in Heygate Estate: 1,200 Number of social-rented units in new development: 79

Figure 6- Image showing overview of costs and figures (Steadman 2013)

Moreover, evidence shows that Lendlease have continued to acquire monetary gains from the development far more than any stakeholder. For instance, the failure to provide adequate levels of affordable housing, as the previous development housed 1033 council owned housing units and the new development only comprises of 25% affordable housing in comparison to the original proposed 35% found in Southwark’s planning policy (35% Campaign group, Imrie and Lees, 2014). Given the size of the scheme Southwark councils own planning policy stated that 432 social rented homes would be delivered not 74 (Wainwright, 2015). Lendlease used a financial viability assessment which is a document which justified why the original 35% planning policy agreements on affordable housing could not be met. Viability assessments assess whether the return of investment for developers would allow for the development to be a viable and ‘profitable’ option. What is concerning about the development as Wainwright’s (2015) research demonstrates that the viability assessment ‘had nothing to do with the schemes viability at all’ and everything had to do with its profitability for the developer, ‘which is all perfectly legal’ (2015:3). Colenutt et al’s (2015) research has revealed that developers routinely submit ‘deliberately pessimistic’ viability assessments, where costs are overestimated, and the Gross Development Values of schemes are under-valued (2015:8) It is also important to note the within the 25% ‘affordable’ housing that is being delivered it will be done so at a capped 50% of the market rate. This means that as previously social rents are calculated in relation to income, affordable rent will be impacted by the market forces. This has meant that the affordable units provided will be 37% higher than social rents and continue to rise of the housing market continues to soar (Wainwright, 2015). Overall, the council continues to take on much of the risk of the development process in agreeing to reduce the number of affordable homes and the existing working-class communities face the most losses. It is clear as to why so few have signed up to the ‘Right to Return’ as they would not be able to afford to live in the new housing estate. Thus, property-led regeneration facilitates for the financialisation of social housing meaning that ‘wealth and power are extracted from the more disadvantaged groups, and delivered up to those least in need of it, worsening inequalities of wealth and power’ (Aalbers, 2017; Page | 10

Shaxson,2018:11). Lendlease have therefore, significantly influenced the implementation of the project due to their explicit aim of economic gain disregarding the existing social fabric of Heygate Estate.

To conclude, the paper has critically assessed the property-led regeneration of the Heygate Estate and the non-monetary and monetary gains and losses and the various risks associated with the development for the stakeholders. The paper has illuminated on the wider macroscale factors that led to regeneration in the area. To meet London plans housing targets councils, take on the financial costs and risks involved in initiating the early stages of the development and engage in freeing up land for developers. On one hand, project delivery groups, Lendlease and SC see the development creating economic, social and environmental value for the wider area. The ability to implement sustainable energy in Elephant Park is a strength of the development. It is also clear that the development has also created jobs and skills creation. However, the paper has used evidence to argue that regeneration has not created value for existing residents. It has in fact displaced the entire Heygate community and has failed to rehouse local residents into new homes as these have been sold to overseas investors. This case study has shown that property-led regeneration has led to the financialisation of the Heygate Estate. As such, Lendlease have created the greatest amount of economic value as they have significantly taken advantage of a developer friendly regime in the pursuit of economic gain, disrupting the social fabric of the Heygate Estate.

Page | 11

Bibliography Aalbers, M. (2016) The financialization of housing: a political economy approach. Routledge Studies in the Modern World Economy. Routledge, London and New York.

Aalbers, M. (2017) Introduction to a symposium on ‘The variegated financialization of housing’.

International Journal of Urban and Regional Research 41.4, 542–54.

Addae-Dapaah, K. Hiang, LK. and Sharon, NYS. (2009) Sustainability of Sustainable Real Property Development. National University of Singapore JOSRE. Vol. 1 No. 1 Apps, P. Southwark ordered to disclose details about Heygate viability. Available at: https://www.insidehousing.co.uk/news/news/southwark-ordered-to-disclose-details-aboutheygate-viability-39857 [Accessed 11 April 2020].

Beswick, J. and J, Penny. (2018) Demolishing the Present to Sell off the Future? The Emergence of ‘Financialized Municipal Entrepreneurialism’ in London. https://doi.org/10.1111/14682427.12612 Booth, R., 2017. Foreign Investors Snapping Up London Homes Suitable For First-Time Buyers. [online] the Guardian. Available at: <https://www.theguardian.com/society/2017/jun/13/foreign-investors-snapping-up-londonhomes-suitable-for-first-time-buyers> [Accessed 15 April 2020].

Coleman, M., 2020. A Natural History Of Heygate Estate. [online] Redpepper.org.uk. Available at: <https://www.redpepper.org.uk/a-natural-history-of-heygate-estate/> [Accessed 12 April 2020].

Colenutt, B., Cochrane, A., and Field, M. (2015) The rise and rise of viability assessment, Town and Country Planning, (84) 453-458.

David Harvey, A Brief History of Neoliberalism (New York: Oxford University Press, 2005).

David Harvey, A Brief History of Neoliberalism (New York: Oxford University Press, 2005).

Davis, C. (2013) Finance for housing: an introduction. Policy Press, Bristol Elephant Park. 2020. Sustainability - Elephant Park. [online] Available at: <https://www.elephantpark.co.uk/sustainability/> [Accessed 10 April 2020].

Greater London Authority (2013)., Heygate Estate, Elephant and Castle. Available from: https://www.london.gov.uk/sites/default/files/PAWS/media_id_112171/heygate_estate_maste rplan_report.pdf [ Accessed: April 11,2018] Greater London Authority, 2013. Planning Report [online] London.gov.uk. Available at: <https://www.london.gov.uk/sites/default/files/public%3A//public%3A//PAWS/media_id_112 171///heygate_estate_masterplan_report.pdf> [Accessed 18 April 2020].

Page | 12

Hatts, J. ((2013), Elephant & Castle: Lend Lease Heygate Estate masterplan approved. Available from: http://www.london-se1.co.uk/news/view/6545 [Accessed: April 13,2020] Healey, P. (1991) Models of the development process: A review, Journal of Property Research, 8(3), pp. 219-238.

Hodkinson, SN. and Essen, CE. (2015) Grounding accumulation by dispossession in everyday life: the unjust geographies of urban regeneration under the private finance initiative. International Journal of Law in the Built Environment, 7 (1). pp. 72-91.

Imrie, R. & Lees, L. (2014), "The death of sustainable communities in London?". In Sustainable London? The future of a global city, Policy Press, Bristol, pp.149-172 King, 2018. Socio-Economic Value at the Elephant & Castle Report [online] Eprints.lse.ac.uk.

Available at: <http://eprints.lse.ac.uk/90160/1/Hall__socio-economic-value.pdf> [Accessed 12 April 2020].

Koessl, G. (2017) Estate Regeneration in London: Politics and Protest, Metropolitics. Available at: http://www.metropolitiques.eu/Estate-Regeneration-in-London.html. [Accessed 02 Apr 2020] Lees, Loretta and Ferreri, Mara (2016) 'Resisting gentrification on its final frontiers : lessons from the Heygate Estate in London (1974-2013).', Cities : the international journal of urban policy and planning., 57 . pp. 14-24.

Lees,L. (2014) The urban injustices of New Labour’s ‘new urban renewal’: the case of the Aylesbury Estate in London, Antipode, 46:4:921-947.

London Tenants Federation, Lees, L., Space, J. & Southwark Notes Archive Group (2014), An AntiGentrification Handbook for Council Estates in London, Calverts Co-operative, London.

Loretta Lees & Hannah White (2019): The social cleansing of London council estates: everyday experiences of ‘accumulative dispossession’, Housing Studies, DOI: 10.1080/02673037.2019.1680814 McGreal S., Adair, A., Berry J., Deddis, B., Hirst, S. (2000) Accessing private sector finance in urban regeneration: investor and non-investor perspectives, Journal of Property Research, 17:2, 109-131.

Minton, A. (2017) Big Capital: Who is London For? London: Penguin Books Orr, B. (1999) A blueprint for the rich. The Independent. Available at: https://www.independent.co.uk/arts-entertainment/a-blueprint-for-the-rich-1103116.html [Accessed 12 Apr 2020] Perera, J. (2019) The London Clearances: Race, Housing and Policing. The Institute of Race Relations. Pp. 6-35 Page | 13

Provan, B. and Power, A. (2019) Estate Regeneration and Social Value, Report to Home Group.

LSE Housing and Communities. Pp. 38-81 Rashbaum, W. (2012) ‘Company Admits It Bilked Clients on Big Projects’, The New York Times, 24th April 2012.

Reeve, D. and Steel, P. (2013) Larry and Janet Move Out (film).

Roberts P and H Sykes (eds.), 2000, Urban Regeneration: A Handbook, London: Sage.

Roberts, P. et al. eds. (2015) Urban Regeneration. A Handbook – Second Edition, Sage, London.

Shaxson, N., 2018. The Finance Curse. Bodley Head. Pp 5-55 Southwark Council (2012) Elephant and Castle Supplementary Planning Document (SPD) and Opportunity Area Planning Framework (OAPF) Available at: https://www.southwark.gov.uk/assets/attach/2884/1.0.5-Elephant-Castle-SPD-OAPF.pdf.

[Accessed 10 April 2020].

Southwark Council (2013), "Opportunity knocks for local people", The Elephant Magazine, Sept Date, pp.8-9 Southwark Council, 2015. [online] Moderngov.southwark.gov.uk. Available at: <http://moderngov.southwark.gov.uk/documents/s57189/Report%20Elephant%20and%20castle .pdf> [Accessed 15 April 2020] Turok, I. (1992) Property-Led Urban Regeneration: Panacea or Placebo? Environment and Planning A: Economy and Space, 24(3), 361–379.7 Wainwright, O. 2015. Revealed: how developers exploit flawed planning system to minimise affordable housing. Available at: https://www.theguardian.com/cities/2015/jun/25/londondevelopers-viability-planning-affordable-social-housing-regeneration-oliver-wainwright [Accessed 12 April 2020].

Watt, P. & Minton, A. (2016) London's Housing Crisis and its Activisms - Introduction. City, 20(2), pp. 204-221.

White, C., 2017. Old Heygate Estate Sells Every Flat To Foreign Investors | Metro News. [online] Metro.co.uk. Available at: <https://metro.co.uk/2017/04/16/every-flat-in-new-london-estatehas-been-sold-to-foreign-investors-6577715/> [Accessed 08 April 2020].

Williams, M. (2015), Elephant and Castle Place-Making: The Next Step. Available from: http://moderngov.southwark.gov.uk/ieDecisionDetails.aspx [Accessed : 12 Apr 2020]

Page | 14

Task 2 Gross Development Value (GDV) Gross External Area

7,400 sqm

Net lettable office space = 15% less than GEA = Net Internal Area (NIA)

6,290 sqm

Annual rent

£210 per sqm £1,320,900

Estimated annual rent Yield (annual investment return)

7.5%

Gross Development Value (GDV)

£17,612,000 LESS Development Cost

Build area = GEA

7,400 sqm

Office construction costs

£1,250 per sqm £9,250,000

Total construction cost Site works including demolition, services, and abnormals The percentage of Professional fees of construction costs and site works

£350,000 12% £1,152,000

Professional fees The percentage of other fees to completion of construction and site works

10% £960,000

Other fees to completion The percentage of contingency costs of construction, site works and fees

10% £1,171,200

Contingency costs Interest (cost of development loan) to completion

£350,000

Anticipated planning obligations (CIL, Section106, etc)

£230,000

The percentage of developer's profit of the scheme’s Gross Development Value

15% £2,641,800

Developer's profit Total Development Cost

£16,105,000 EQUALS Residual Land Value (RLV)

Residual Land Value

£1,507,000

What is the implication of the building being let immediately after completion? What if the building was not let immediately after completion?

Land which has potential is valued through a Residual Valuation. The sum of money available for purchase of the land can be calculated form the value of the completed development minus the cost of development. Investors, therefore, must consider time, risk and uncertainty within a development. The GDV is the long-term benefit acquired after the completion of the site.

This means that if the building is let out immediately, I would be able to pay back money that has been borrowed as the money has been put to productive use and I am obtaining the expected value and profits. If the building is let out immediately the project will remain viable as the residual land value reflects a good profitability of the property after the development.

Page | 15

On the other hand, if the building was not let immediately after completion there will be no annual rental income stream coming in. I will therefore generate no profit and the residual land value would plummet. This will mean that the wealth of the shareholders will decline. Ultimately this could lead to an exit and failure of the project. Figure 1 shows a chart which shows the developer profit falling due to rent-free periods where no annual rental income is being generated. By the fourth year the developer’s profit will be falling into negative margins.

Changes in the developer's profit £3,000,000 £2,641,800 £2,500,000

£1,836,550

Developer's Profit

£2,000,000 £1,500,000

£991,038

£1,000,000

£103,249

£500,000 £0

0

(£500,000)

1

2

3

(£828,928) 4

(£1,000,000)

5

(£1,807,715)

(£1,500,000) (£2,000,000) (£2,500,000)

Rent-free period (Years)

Changes in the Yield 8.00%

7.50%

7.00%

6.98%

6.52%

6.12%

6.00%

5.77%

5.45%

Yield

5.00% 4.00%

Figure 3 – Changes in developers’ profits and yield

3.00% 2.00% 1.00% 0.00%

0

1

2

3

Rent-free period (Years)

4

5

Which assumption would most affect what price you could offer for the site? How could you show this?

The price that I could offer for the

site would most be affected by the Yield. This is shown in figure 2 which shows that the yield against the developer’s profit, construction costs and annual rental income and how this change when the percentage of returns change. The percentage changes in the Yield affects the total GDV, developers’ Page | 16

profits, total development costs and most important the RLV. The rent also affects the residual land value proportionally.

£10,000,000 Construction Costs Market Rent Change

£8,000,000

Developer's Profit Yield

£6,000,000

£4,000,000

£2,000,000

£0

-10%

-5%

-2%

0%

2%

5%

10%

(£2,000,000)

(£4,000,000)

Figure 4 - Comparison of assumptions

In table 1 the impact of the yield on RLV is the most significant when the assumptions are analysed at a constant rate.

The proprotion of change Rent Yield Construction Cost Developer Profit

-30%

-20%

-10%

0

10%

17.65%

20%

30%

RLV

-2,984,060

-1,487,040

9,980

1,507,000

3,004,020

4,148,800

4,501,040

5,998,060

Deviation

4,491,060

2,994,040

1,497,020

0

1,497,020

2,641,800

2,994,040

4,491,060 -2,557,308

RLV

9,055,000

5,910,000

3,463,889

1,507,000

-94,091

-1,134,800

-1,428,333

Deviation

7,548,000

4,403,000

1,956,889

0

1,601,091

2,641,800

2,935,333

4,064,308

RLV

4,282,000

3,357,000

2,432,000

1,507,000

582,000

-125,353

-343,000

-1,268,000 2,775,000

Deviation

2,775,000

1,850,000

925,000

0

925,000

1,632,353

1,850,000

RLV

2,299,540

2,035,360

1,771,180

1,507,000

1,242,820

1,040,800

978,640

714,460

792,540

528,360

264,180

0

264,180

466,200

528,360

792,540

Deviation

Table 1 Changes in the RLV and Deviation

Page | 17