The regeneration game

Alan Clawley comments on Birmingham city council’s use of its property portfolio.

During his tenure as chief of regeneration in Birmingham Clive Dutton said much that has since proved to be wrong, but like all good spin doctors, much of what he said can be interpreted in more than one way so whatever happens, they are never wrong.

Perhaps his most audacious claim was uttered in November 2007 just before the property crash. The Post reported him saying, [there is] an insatiable appetite among private sector developers to buy sites in the city centre…please trust me that we know what we are doing”. So far he has been proved wrong, at least in the case of Paradise Circus. There the council has sold none of its land and what is worse has had to resort to Compulsory Purchase powers to buy land back from developers who bought it from them in the 1980s.

In one way though, Dutton was right. Private property developers do have an insatiable appetite for land because that’s what they need to make their money. In the ‘normal’ market conditions that pertained before 2008 they bought up land or property that was unfashionable, underused or otherwise unloved. As soon as they got planning permission for a new building or a scheme of refurbishment its value would shoot up without a brick being laid. At that point they could sell it to another developer or borrow the capital with which to implement the planning consent. With a good income from annual rents they could hold on to their investment for a few years before cashing in on its increased value by selling it on. When times were good they could even promise the Council a cut under a binding Section 106 Agreement. Argent followed this model at Brindley Place and no doubt expected to use it again at Paradise Circus.

So what’s gone wrong? Why didn’t Argent snap up the council’s landholdings at Paradise Circus a few years ago when prices were at rock bottom?

One answer must be that the council was unwilling or unable to sell the land on the open market in such circumstances. They would have been criticised by their political opponents and the voters for selling the family silver at too low a price. Rather than wait for the market to recover they decided to sell leases to Argent and hold onto their freehold interests for the future.

The close relationship between the council and Argent complicates the issue because they are partners in a Joint Venture Company which is the legal entity that will enter into the leasehold agreements. In effect the council is negotiating a deal with itself. This could be another reason why property prices are uneconomically low. The council’s interests are kept ‘within the family’ and not finally disposed of. What goes on between them is deemed by the Council to be ‘commercially sensitive’ and not subject to the Freedom of Information Act so we shall never know what deals are struck anyway.

Another reason why the selling price for the Paradise Circus site is low is the unusually high cost of preparing the site for redevelopment. Argent would have been unable to offer much for Paradise Circus after covering the cost of demolition, road works and other site preparations. Luckily for them and the Council, the Local Enterprise Partnership came to the rescue with its Regeneration Zone and allocated £61 million for the job instead. So all Argent have to do is to find £160 million to build the first office block. Once occupied this will enable Argent to make lease payments to the Council who will also get Business Rates as there is no holiday for businesses re-locating to Paradise Circus.

Property developers will always adapt to changing circumstances. When times are difficult – as they are now and as they will be for the foreseeable future – they bide their time and hope that the market will eventually get back to normal. If it doesn’t, and they haven’t managed to strike a deal like Argent have, they will find something else to do to make ends meet. Is it is healthy for the city council to be tied exclusively to Argent whilst others are left to their own devices and at the mercy of the market? After years of delay the council appears desperate to see a start on its ‘flagship’ project in Paradise Circus and is using public money to prop up the market on behalf of its chosen developer. We can only hope that they know what they’re doing. This week I will be meeting a representative of Argent to find out.