Andrew Conroy, Property Director at Capita, explains how local authorities can structure property development partnerships to make sure that residents and local businesses are projects’ major beneficiaries.
Most councils have under-used land or buildings that could potentially be developed (especially if put aside with other land holdings) to kick-start regeneration and growth. But, for many, large-scale developments are daunting due to their complexity and risk. The good news is that they don’t have to do it all on their own. The key to success is to find the right partners and to structure those relationships so that the local community and businesses benefit as much as the developer does.
Property development partnerships can generate financial benefits for local authorities by increasing the value of their land and adding income-generating properties, which in turn can create surplus long-term revenue for future reinvestment. They also stimulate a community’s economy by creating more homes and places of work, as well as growing the base for taxes and business rates collections.
They generate direct social benefits such as upskilling small to medium-size enterprises (SMEs) and supporting and empowering local suppliers. Carefully thought-out development partnerships can enable skills training and education or integrate apprenticeship programmes into the supply chain. They can also reduce waste, power consumption and pollution.
All these benefits mean that local authorities can meet policy objectives such as supporting people, places and the economy through a property development partnership. But they can only realise these benefits by planning ahead and engaging a partner that knows how to work these benefits into the project.
Here are five key things that local authorities should consider when setting up property development partnerships.
1. Set out a clear business case and rationale
Before engaging with a potential partner, it’s important to know what your goals are for the development not just financial ones such as revenue and profit margins but also developmental ones such as neighbourhood regeneration, skills development or reduced carbon emissions. Determining and prioritising your goals will help you to select the appropriate partner and structure the relationship so that you achieve them.
Lead organisations need a well-articulated vision and a structured business case with defined and ranked objectives. The Five Cases model, as set out by the Treasury, is a generally accepted approach that takes into account the strategic, economic, commercial, financial and management considerations that should go into any investment proposal.
You should also include a demand analysis in your business case to understand the potential for end users and plan to meet their needs, so that, wherever possible, they are identified and secured to help de-risk the project and maximise revenue generation from day one.
2. Plan a streamlined, achievable and well managed programme
Create a detailed plan and make sure that your interests and those of your development partners are aligned by setting incentives for reaching key milestones that will keep the project on track. Take care not to set up any conflicts of interest between you that could cause delays and misalignment, for example your partner should not have a financial interest in any of the other suppliers.
3. Structure the partnership to match your appetite for risk and reward
Local authorities can carefully manage, assign or mitigate development risk, when acting as the primary sponsor and reap more of the rewards, too. This may mean sourcing a commercial loan to fund the development and contracting a developer to do the work.
Alternatively, you can de-risk the development by finding a partner to take on the role of primary developer, but you will have to give away more margin in return.
It’s also worth considering that stepping away, for example by appointing a primary developer to take on all the risk, may not deliver the scale of outcomes you originally planned.
4. Get the right partner(s) on board
Make sure that all the parties involved are making a contribution that plays to their strengths and for which they are being appropriately rewarded. This ensures the best possible outcome in terms of the standard of what’s delivered and the project’s financial sustainability.
Much will come down to how much risk you are willing to take, or whether each risk is to be transferred to the partner.
Planning risk: You should decide whether you want this underwritten and paid back by the partner on signature of the development agreement as an early reward.
Construction risk: Underestimating construction costs is a prime example of optimism bias by public sector partners, as demonstrated by several major government contracts in the last five years. The extent to which you want this risk to be taken by your partner is crucial to the negotiated deal. For example, you can ask for this to be substantially underwritten but it will affect the return that your partner offers you.
Development finance: The cost of financing the construction and fees over the building programme is an important element. You can ask for the offer to reflect a forward funding solution that allows you to draw down finance immediately, or delay payment until revenue return is coming through on completion.
Investment finance: Some partners, such as Capita, have access to a range of funds that will consider investment based on the covenants in the scheme. These can include long-term debt finance at rates competitive with government sources.
5. Manage costs but not at the expense of generating value
It’s essential to manage cost strictly to ensure that your project doesn’t miss its financial goals. If the development costs more money than it generates, you won’t be able to invest excess revenue in improving community services.
However, you shouldn’t cut costs at the expense of the project’s purpose, which may include non-financial goals such as creating employment, providing homes or making the neighbourhood safer or greener. This means ensuring that the decision-making structures in your partnership are appropriately balanced, so that one partner can’t override the achievement of an important outcome in the name of cost saving and profit margins.
In summary, successful property development partnerships that embody the approach set out above, will:
- help you to build trust and relationships, through a well-structured process
- identify and successfully manage development risk; and
- use your land and property assets more productively to achieve the maximum benefit for your communities.
To find out how we can help you to plan and manage your next property development so that everyone benefits, contact email@example.com