The need for a greater focus on market and needs analysis to shape the case for new projects

More emphasis on market/needs analysis on many projects can help confirm the strategic case for investment and also clarify the scale of potential displacement. 

‘Displacement’ in the Green Book is about whether proposed activity will result in a reduction elsewhere. So, for example, if public money is used to help develop new employment space would this result in reduced occupation and/or development somewhere else? 

My experience is that an emphasis on considering whether markets are supply or demand constrained can be helpful in assessing displacement. If a market is supply constrained then extra supply is less likely to displace other activity because it is just helping the suppressed demand to express itself and allow more economic growth.

Relevant information to determine whether markets are demand or supply constrained include for example: 

• Trends in rental levels (increasing above inflation implies supply constraints)
• Availability rates (8% of total stock being available on the market is often taken as a market equilibrium rate and low rates suggest supply constraints)
• Yields (low yields suggesting strong demand)

While market demand is not always relevant or easily applied to all types of projects it is certainly useful for most property-related development.

Less emphasis on a land value uplift approach to assess economic benefit

The Ministry of Housing, Communities and Local Government (MHCLG) Appraisal Guide supplements the Green Book and provides a property-specific approach on how to assess the economic case for investment. 

It has developed a land value uplift (LVU) framework for assessing economic benefits. The basic idea is that most economic benefits translate through and are captured by changes in land value. 

This is questionable if your view is property markets do not perfectly capture other benefits. It has become increasingly clear that the approach suffers from other drawbacks and complications as well. For example, almost by definition a regeneration project will have a negative LVU because the whole point of public sector funding is to bridge the gap between development costs and value on complex projects with commercially difficult-to-capture wider benefits. 

This means that appraisals need to rely on ‘wider LVU’ metrics where an assessment is made on the impact on land values in the area surrounding projects. My view is a catalytic impact including wider LVU is definitely a factor on some of the best regeneration schemes, with examples being Brindleyplace in Birmingham and King’s Cross in London. We also found a significant wider LVU effect relating to major transport projects, such as the Jubilee line extension and the Elizabeth line, in research we carried out for Transport for London. 

However wider LVU is a difficult factor to quantify and much depends on the specific characteristics of the local area and property markets. 

Overall the issue is that assessing LVU effects has ended up being too complex and based on too many assumptions and judgements feeding in to complex models. Instead the process should be simpler and more qualitative, drawing more on market characteristics, assessment of quality of the proposals, and relevant case studies and examples of other schemes, both successful and that have had problems.

A simpler approach to economic and social benefits with more emphasis on quality

The Green Book and the MHCLG Appraisal Guide both allow for inclusion and quantification of wider economic benefits. Examples include the value of public open space and heritage assets, the health and education benefits of affordable housing, carbon savings, and the crime reduction benefits of regeneration. 

There is a growing body of research and benchmarks that tend to be used for quantifying these benefits. However, while I agree that many of these benefits are real and present on good schemes the research quantifying most of these is based on a range of moot assumptions. This is then compounded by further assumptions that the wider research values are applicable to each scheme being appraised. This often avoids addressing the more fundamental questions around the quality of the proposals. Like LVU, I suggest taking a simpler approach and placing more emphasis on quality and a qualitative consideration of potential impacts on wider social and economic benefits.

Conclusion: more emphasis on simple metrics like cost per job and per home delivered

Before the LVU approach was introduced, public sector regeneration funding projects were often measured against simpler metrics such as cost per job created and/or home delivered. It would be good to return to this simpler approach, but with the big caveat that it should be combined with the market/needs analysis, consideration of displacement and viability analysis. 

The risk of not doing this is that the approach would tend to favour projects that have low costs per job and/or home but would have been delivered anyway. The advantage of combining simple metrics with consideration of market need and viability is it then allows spending to be focused on the most cost-effective projects that need the gap funding to be taken forward. They also allow a simpler and more transparent approach to project appraisal and review. 

Further information

Contact Rory Brooke