GUEST ARTICLE

May 2009 Newsletter

WHAT’S DOWN FOR THE CORE CITIES IN DIFFICULT DAYS

The Credit Crunch, Recession and Regeneration
by Professor Michael Parkinson, CBE, Director of the European Institute for Urban Affairs, Liverpool John Moores University

The last decade has been a very good one for the Core Cities, underpinned by a buoyant national economy and major public expenditure.  During this time they have recovered from a period of massive economic restructuring to develop new economic niches. They have given political and economic leadership to their surrounding regions. They have won the argument in policy circles that cities are assets not liabilities, the drivers of regional and national economies. They have delivered a huge amount of physical regeneration. All the core cities look and feel dramatically different today from 10 years ago. But how much have those achievements been challenged by the credit crunch and the global recession? What are the risks and who should do what about them?

Which projects and places have been worst hit?

The effect of the credit crunch is simple, although the causes are complex. Lenders won’t lend; borrowers can’t borrow; builders can’t build and buyers can’t buy. There has been a flight from risk and a flight to quality across the board.  Economically and financially marginal places, projects, partners and people have been most affected.  The crunch hit them soonest; it will probably be deepest and last longest. Housing has been most badly hit especially the city centre apartments market, buy to let and volume house builders. Other sectors have been less badly affected so far – but the position is worsening by the day.  Projects that have started will probably finish. Many projects that were about to start may not. The position is worse where the market has overprovided in recent years and where developers are financially exposed.  It is better where the developer has long term aspirations and resources, where the money was organised before the credit crunch began and where there are pre-lets for projects. The real risk is to the future pipeline and the loss of momentum, confidence, capacity and skills. Public sector projects have been most likely to continue. The public sector is currently keeping the wheels of regeneration turning. The Core Cities have much at stake in this process.

As my recent study for John Healey at CLG showed, the crunch and recession do not respect place.  Nowhere is immune. But so far London and the South East have been better protected.  But the wider position there may change as the economic downturn hits jobs in the financial services. The North and Midlands and by implication the Core Cities have been most directly in the firing line and most badly hit so far. The cities with more robust economies and more entrepreneurial leadership will weather the storm better than others.  The economic one horse towns which we worried about in the good years are even more vulnerable in the bad years. Paradoxically public sector employment may protect places from the worst of the recession, as it did in the 1990s. To him that hath shall be given.
           
Impact on the Core Cities

Again the Core Cities have much at stake here. The credit crunch has already affected their performance and prospects.  The numbers of planning applications are down. They have all lost planning fee income. Business rates summonses are up. Summonses for empty properties are up.  All are having problems getting in capital receipts. Deals are falling through late in negotiations and developers are offering much lower amounts for retail sites. Receipts from right to buy schemes are lower. Many expect a growing gap in their three year capital programme. Most expect their capital programme to be rather smaller than initially planned and some schemes likely to be postponed or abandoned.  The credit crunch has also raised the cost of short and long term borrowing. All this is putting pressure on revenue budgets and hence services. Most recently reductions in local authority jobs have been announced by two Core Cities. In terms of the wider economy, construction and financial service jobs have driven much growth in the Core Cities in the last decade. They are obviously particularly vulnerable in the short and perhaps longer term as well. So the threats to the Core Cities’ achievements of the last decade are visible and real.
                       
So what should we do about it?

The crunch is a constantly moving target. However three things are clear.  First, the financial crisis in particular is as severe as anyone can remember.  Second, it is not over yet and the pressures on regeneration will get more intense in the coming months. Third, this means that identifying and sticking to some clear principles to guide our behaviour in the future will be even more important. Those principles are not rocket science.  Mainly they are those which partners have developed together in the recent good times. Indeed a crucial message from this report is that principles which are good in good times are even better in bad times. They include:

All partners must do what they can to maintain momentum and optimism. The markets will eventually recover. Greed will overcome fear. It is important to prepare for that upturn whenever it comes. At difficult times it is important to remember that regeneration is a long run game. Projects and principles which were good a year ago are good today and tomorrow.  Policy has shifted too many times too quickly in the past with many promising urban policy babies thrown out with the bath water. The credit crunch should not be an excuse to repeat that process. The public sector and the government in particular must continue to show leadership on the regeneration agenda.  It must not blink and it must not panic.

The evidence of the past decade in the good times was that developers and development and investment will go to cities where:

There are many examples of this in the Core Cities in recent years. Those principles will become even more important in future. Getting out of this crisis is not a challenge for government alone. All partners will have to play a part. But we will need to do some different things in future given the new challenges.

 

Making places not building houses

Housing has been badly affected by the credit crunch and will continue to be so in future.  The housing business model that underpinned the boom of the 1990s will not work in the next business cycle.  Even before the crisis there were real concerns about the over provision of city centre apartments and the absence of family homes and the infrastructure that makes them viable. The financial crisis underlines the weaknesses of that model.  Equally there are questions to be raised about the real level of home ownership that is desirable and possible in the future and the balance of building homes for sale as opposed to social renting. There is clearly a demand for rented market accommodation in many places. But the crunch has highlighted the weaknesses of a system which depends upon the individual landlord rental model. We must explore a financial system which encourages major institutional investors to become involved in the long term provision of private rented housing that would give the flexibility of the current system and better standards.
           
More generally we must have a greater focus upon place making rather than house building. This has implications for the provision of infrastructure in places. It has implications for the numbers of houses that it will be possible and desirable to build in future.  It has implications for the targets that are set for public agencies. There is considerable anxiety in the regeneration industry that the current housing and regeneration targets will not be achievable in regeneration areas in future and that resources will flow to other areas where the targets can be more easily achieved. To avoid cherry picking and abandoning regeneration areas, those targets should be looked at to determine whether they will encourage sustainable regeneration in future.  One benefit of the slowdown in regeneration is that it means some of the government’s more ambitious housing targets will not be achieved. And it offers a real opportunity for the public sector to make the infrastructure provision now so that places are more ready to benefit from renewed private sector investment when the upturn does happen.

Investment, risk and innovation  

The financial model which underpinned regeneration during the past decade is fractured if not broken. The banks and investors which paid for it in the past are unlikely to do so in the same way in future.  Long term financial partnerships between the public and private sectors - and the use of public resources in those partnerships - will become a more fruitful way forward.  There has been much discussion of the merits of asset based vehicles in recent years.  The details are complex and they vary.  But such ventures will be the best way in which sufficient resources will be created for regeneration in future.  To over-simplify the point greatly, at present the public sector has physical resources if not so many regeneration skills, whereas the private sector has many of the skills but few resources.  A number of public sector organisations have been developing these initiatives. There is great support for the general principle that the public sector should become more of an investor in long term regeneration, sharing the risk and sharing the rewards and recycling them for future projects. The new Homes and Communities Agency must endorse those principles. This study has shown some long term developments in such arrangements are managing to keep going.  So there is evidence that a more general application of these principles will bear fruit in challenging times. Core Cities themselves have pushed the boat in this field with its innovative Accelerated Development Zones.

 

New economic drivers?

We should also recognise that the sectors of the economy which underpinned Core Cities’ renaissance in the last business cycle may not be the best for the next one. The drivers of much of the renaissance were retail, leisure, residential and financial services.  These are primarily consumption or service sector activities. They may not be as robust in the future.  Core Cities should think of more high value added production activities based upon innovation and learning or more sustainable sectors which feed into the national and global low carbon and sustainability agenda.

 

 

The human and social costs of the recession

Finally my report focused upon the physical and economic dimension of the credit crunch upon regeneration. But it also highlighted the social and human consequences of the credit crunch. Many communities that have experienced difficult times for many years have been badly hit by the downturn.  It is crucial that all can be done to protect the plans that were made for those communities. Many regeneration agencies are concerned about breaking moral commitments to communities if they cannot deliver agreed projects.

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