In the second interview of our Southern Powerhouse series, Malcolm Young, chairman and chief executive of The Wilky Group, talks about the key challenges affecting the South of England, particularly the impact of the financial crash in 2007/08 and difficulties in obtaining planning permissions.
Young is clear about what needs to happen to ensure the south’s future economic wellbeing: “The first problem is to define exactly what constitutes the geography of the region. If we include the coastal areas from Kent to Dorset, their economies are very different from those of Surrey and the Thames Valley for example.
“The situation is quite different from the Northern Powerhouse, where key cities are more clearly defined entities. Delivering regional planning is done through things like the government-sponsored City Deals; the closest we get are unitary authorities.”
At a regional level, Young has played a big part in many influential groups, including Enterprise First, being chair of the local enterprise partnership Enterprise M3’s Land & Property Group, and serving on the CBI South East Regional Council, so he has seen at first hand what other parts of the country have implemented to make things happen: “What’s needed is a body similar to the Greater Manchester Combined Authority (GMCA) with powers to plan and deliver regional growth,” he says. “This consists of political leaders from each of the ten borough councils, with a directly elected mayor, and responsibility for over-arching economic development, regeneration and transport in the region.”
“Axing regional development agencies in 2012 meant we lost this ability. Their replacements – local enterprise partnerships (LEPs) – are only just getting into their stride. They are producing strategic plans for their economic areas and provide a conduit between central and local government, but suffer from being non-statutory and under-funded.
“In addition, both Hampshire and Surrey have been deliberately split internally, with each having two different LEPs. All this makes it difficult to promote and navigate significant strategic proposals through to adoption and funding. That’s why City Deals and partnership deals are seen as the way forward.”
Young believes the Oxford to Cambridge Arc (via Peterborough, Northampton, and Milton Keynes), which the government describes as ‘an area of significant economic potential’, is something the South should emulate. That initiative has cross-ministerial backing from housing, environment, treasury, and transport, and involves the thirty-one local authorities and four LEPs in the locale.
“It means the public and private sectors are working in structured partnership. They’re driving an agreed agenda under the umbrella of a government minister with a common vision – not competing against each other,” Young explains.
“In the South, we need to create our own vision and proposal that will gain support locally. The LEPs should develop sustainable regional plans and collectively make the case to government for policy support and funding. A failure to do this will make it more difficult to deliver economic growth and meet the social needs of our communities, whatever the outcome of Brexit.”
Strong commercial property expertise
He also points to the possible impact of also factoring in the HS2 rail line from London to Birmingham, which he says could see development taking place north of the M25 motorway, at the expense of the South.
Young acknowledges the need for developers to improve their engagement with communities, pointing out that they must make the case for sustainable growth being absolutely essential to maintain the South’s quality of life, as well as its prosperity.
A Fellow of the Royal Institution of Chartered Surveyors, Malcolm Young has been involved in the commercial property market in Surrey, Hampshire and Sussex for over fifty years, and was seconded to become the first UK managing director of McArthurGlen, the factory outlet centre operators.
Included in the more than eighty projects completed by the Wilky Group since 1973, are Watchmoor Park in Camberley (45 acres of business development), and the largest primary healthcare centre in the UK at Blackwater Park in Aldershot. Being proposed is the Gatwick Green concept, a 600 acre mixed-use scheme, which is designed to enable the local economy to benefit from the airport’s commercial success.
Challenges affecting the South primarily relate to the delivery of successful developments, Young suggests: “They are,” he explains, “finding a more sustainable approach to financing, the property cycle and planning delays, all of which result in increasing risk, cost and sustainability. Ultimately, we all pay the price.
“Taking these in turn, project finance is based on its forecast profitability, which results in a debt to equity ratio. Prior to the crash in 2007/8 this gearing was at an all-time high, and it was often based on optimistic forecasts.
“What happened next, for different reasons, has been a feature of all recessions since the seventies; once values drop and the gearing becomes higher than banks will accept, they demand the restructuring of loans with increased equity. If this is not available, the whole of the borrowings can be called in, followed by bankruptcies and liquidations.
“One way to deal with this would be for finance valuations to reflect fair value, so that rather than using a low valuation after a recession, or a high valuation because of buoyant demand, an average value can be calculated. This is a more sustainable approach.
“It has been calculated that the banking sector lost some £7 billion following the last recession, due to exuberant lending to property immediately before the crash. The lessons have been learned and we know the banks are not shy in protecting their businesses, with consequent effects on their customers.
“Moreover, these effects can leak into the wider economy and require government intervention, as we have recently experienced. The recovery period from these episodes is always underestimated and we are only now back where we started more than a decade after the event, with commercial property having suffered an average 40% drop in values.”
The third factor, says Young, is that planning has become progressively more difficult over the last fifty years, and shows no sign of getting any better. The revised National Policy Planning Framework still relies on local core strategies being delivered by local authorities but, he believes, the process of delivery has worsened.
“Significant cuts to local authority funding as a result of the abolition of graduated rates support by 2020 has, as we all know, led to cuts to services. While it’s right to protect vital services, others have borne the brunt.
“It’s been suggested that planning department budgets have been cut by 25% across the board, so we have increasingly complex regulations and procedures, coupled with a reduction in resource to manage them. It’s no surprise, therefore, that obtaining planning permission has become harder, not least because of the need to negotiate a plethora of community benefits as part of the consent process.
“This is not to say it is wrong for developments to pay a fair price for their impacts on the community – schools, roads, sewage and the like, but the negotiations often add significant extra delay and costs, which belie official statistics on the time it takes to get consent for a scheme.
“This cost has to be passed onto tenants or purchasers and causes price inflation out of all proportion to any community gain. We have calculated that the cost/time delay and additional changes to design required by planners has added 10% to the cost of a recent project.”
Overall, Young is concerned that the economic performance of the South has been too easily taken for granted: “The main net contributor to the exchequer after London is the South, and we have a proven track record of providing UK plc with a better return on investment here, even though that might not be politically acceptable to talk about. But in a fast-changing world there’s always fragility. Even though I’m a glass-half-full optimist, I have to say there is much that needs to be done in the South and we are still behind the curve compared with other areas of the UK, not to mention some of our continental cousins.”
Find out more about the Southern Powerhouse here, or please contact Nick Leavey, Head of our Real Estate Sector. Nick will be speaking about the Southern Powerhouse at the Regenerate South conference on 4 June – click here for more details.