London housing zones have the potential to provide thousands of new homes and unlock billions of pounds of development. So what do contractors need to know to get a slice of the action?
- What are housing zones?
- Doors open to institutional investment
- Connections crucial to success
- The challenges that lay ahead
- Energy factor
- Political football
Have you heard of Meridian Water? It lies immediately south of the north circular road in the London Borough of Enfield and is a 20-minute train ride from the centre of London.
Take a trip out there today and you would find a derelict area that is far from homely.
“You would see combined disused gas works, with pretty poor quality industrial units and some areas of vacant land with no particular use at all,” Enfield chief executive Rob Leak explains.
But plans are afoot that would see the area transformed, with £1.5bn of development providing 5,000 new homes with 3,000 jobs, schools, rail infrastructure and a decentralised energy network.
Click on map to enlarge
From 2015 things will start to change at Meridian Water, after it was earmarked by the mayor of London to become one of his new ‘housing zones’.
Enfield is one borough out of a possible 20 that will be given housing zone status in the capital under Boris Johnson’s plans to take under-utilised brownfield land and speed up housing supply by using local authority planning powers.
In total, the zones are expected to deliver 50,000 new homes across London over an average 10-year period, with the first batches coming forward between 2015 and 2018.
London boroughs have until the end of September to bid for housing zone status, so what do contractors need in order to get involved?
What are housing zones?
The London housing zones will be led and driven by boroughs, in partnership with the private sector.
Boroughs must submit plans that include the construction of at least 1,000 homes in order to receive a share of £400m-worth of funding and gain housing zone status.
Funding is available through a 50:50 split between the GLA and central government, at least half of which is in the form of loan. Remaining funding will be flexible and could include grants.
“We’re talking about a very large volume of housing, so they are schemes that are transport dependent”
Bill Hughes, Legal & General Property
Five boroughs are frontrunners for housing zone status: Meridan Water (Enfield), Southall (Ealing), Tottenham Hale (Harringey), Poplar Riverside (Tower Hamlets) and Winstanley and York Road Estates (Wandsworth).
Combined, these five boroughs are set to bring billions of pounds worth of development to the capital through the zones.
Mr Leak says Enfield’s Meridian Water will bring big opportunities for a range of contractors.
“There will be at least five phases to begin with, and there is potential that different firms and architects will be used for each as well as different construction companies, so there is a lot of business to be won.”
Doors open to institutional investment
The zones could offer a new route into the residential sector for institutional investors, according to Jones Lang LaSalle head of residential Adam Challis.
He says institutional investors will be interested in getting involved, favouring larger-scale projects.
Legal & General Property will certainly be one firm keen to invest in the new zones, according to managing director Bill Hughes.
“We’ll be looking and taking the time to [review] the schemes we think will be most likely to deliver,” he says.
“The zones highlight the importance of the understanding of the wider infrastructure, which is central to reshaping the areas’ principles”
Adam Challis, Jones Lang LaSalle
“We’ve got a commitment to the sector, we’ve got some expertise and we have a significant volume of capital: all of those situations we’ll be reviewing.”
But Mr Hughes stresses Legal & General Property will take its time to prioritise investment based on each borough’s long-term plans.
“We’re not going to want to be involved in every single zone. We will try to differentiate between the best, the most deliverable and the most likely to deliver success.”
He says there must be “collective will, leadership, the need for the public and private sector to work together” for housing zones to succeed and political uncertainty to be removed for investors.
Connections crucial to success
He adds that “transport infrastructure is pivotal” to the success of the zones, with major schemes dependent on good links to and from the City.
“We’re talking about a very large volume of housing, 1,000 units or more together with employment, so they are schemes that are transport dependent.”
JLL’s Mr Challis adds: “[The zones highlight] the importance of the understanding of the wider infrastructure, which is central to reshaping the areas’ principles and focusing development on the needs of local people.”
The GLA says good transport accessibility will be factored into evaluating each borough’s potential to be afforded housing zone status.
This could include infrastructure already in place, projects that have started, or new rail or road infrastructure, provided it helps to unlock new housing.
Enfield has committed around £80m for rail and bus terminal upgrades to date and connections with London’s airport hubs will be improved, with trains set to stop at Meridian Water on the way to Stansted.
Ealing’s Southall area will also be boosted by new transport links, its assistant director of regeneration Lucy Taylor explains.
“It all comes down to Crossrail and the opportunities it gives,” she says. “Southall was identified as one of three areas in London which had greatest potential to deliver economic benefits [because of the railway].
“There are lots of areas of land that are under-utilised next to the station and that offers lots of opportunities.”
The challenges that lay ahead
With any plans of this scale there are inevitably plenty of challenges to come.
For Mr Leak, potential problems lie in the remediation works that will have to take place, as well as the creation of a decentralised energy network to provide sufficient power for Meridian Water and neighbouring areas.
But challenges around land ownership and upfront capital costs will be mitigated by Enfield taking on the bulk of the investment costs, with the private sector expected to move in as the risk threshold starts to change.
“In terms of ownership and investment we are going to take the strain. It makes the conversation a lot easier if we take the financial strain”
Rob Leak, Enfield Borough Council
“We could picture a development partner resisting putting in the upfront cost which is why we will primarily be the major investor,” Mr Leak says.
“This is with the belief that, as the scheme generates sufficient cashflow and profit, we could sell part of the shares to the private sector investor or enter a joint venture.
“We would use the private sector to manage [the development], but in terms of ownership and investment we are going to take the strain, as we can think long term. It makes the conversation a lot easier if we take the financial strain.”
The first pipes for its new energy network will be laid by 2017. Enfield wants up to 3,250 homes to be unveiled at Meridian Water by 2018 at the earliest.
In its bid for housing zone status, Enfield will stress the potential for its energy network to eventually run “up and down the Lea Valley all the way to the Thames, M25, east and west”.
Ealing’s Southall zone has challenges of its own, Ms Taylor says.
“Central London housing prices have gone crazy and that has started to come out to the east of our borough into Acton and Ealing,” she says.
The borough also has multiple land owners sitting on schemes in various stages of development.
“It’s early days right now and it’s still important for the political environment within which this is happening to remain stable”
Bill Hughes, Legal & General Property
But the housing zone could help here, with Ealing working on a “site-by-site basis”, she says. Development will be split into six sites where project values will range from around £20m to £200m.
If developers don’t come forward with projects or there are issues over land ownership, the authority may use planning powers such as compulsory purchase orders.
Mr Challis sees potential for the zones to unlock large-scale private rented sector development.
Legal & General Property’s Mr Hughes says there should be “a stimulus of PRS” but that “a mix of tenure” will be important.
“[The zones] need to include consideration of social housing, of retirement villages, of build to sell and a range of affordable tenures”, he says.
Mr Challis adds that it is “up to the industry” to shape each zone and it shouldn’t be a “one size fits all approach”.
The government has now committed an extra £200m of funding for housing zones to aid development across the UK.
But how do you take housing zone applications and create thriving boroughs that help solve the UK’s supply crisis without turning development into a political football?
Mr Hughes says his “plea” is for housing policy to not be subjected to politician’s whims. “There is a well understood housing supply crisis and lots of different solutions need to be working concurrently to help resolve that.
“Private and institutional capital is undoubtedly going to be part of that… but it’s early days right now and it’s still important for the political environment within which this is happening to remain stable.
“Politicians need to do what they can to present continuity and stability rather than radical intervention.”
So while boroughs finalise their applications and investors cast their eyes over plans, contractors have a chance to help transform London’s boroughs.
If you hadn’t heard of Meridian Water before, you might just want to take a look.
With £400m up for grabs, here are some ways to use this money.
Infrastructure/gap-funding Some housing zones could use funding for specific infrastructure needs which cannot be immediately borne by developers, investors or the relevant public funding bodies.
Supporting home ownership
London Housing Bank
Land remediation and site preparation A number of potential zones are expected to need upfront land remediation and site preparation. In most cases front-funding by the GLA would be able to improve the cashflow of a scheme and allow a commercial return to be paid.
Affordable homes delivery
Other investment Potential bidders are encouraged to consider all potential sources of investment into housing zones, including pension funds, insurers and other institutional investors.
What could the boroughs do to speed up development?
GLA as broker
Private rented sector support A zone may be an area where the planning system encourages the PRS in order to increase the pace of development and add to the range of housing options available.
Compulsory Purchase Orders Zones may have sites in third-party ownership, holding up planning and development and where a CPO may be necessary. If so, the borough may be prepared to commence CPO proceedings, or the mayor could, if appropriate, use his CPO powers.
Local Development Orders