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built environment insights | INFRAREAD 26 Sep 2017 Development around UK transport hubs

Infrastructure as a catalyst for growth

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Transport-orientated development, particularly in London, has been a feature of the real estate development market for some time. The current number of new development opportunities being created around transport projects, and the release of land adjoining and airspace above rail infrastructure for development purposes, is unprecedented in scale. In central London the regeneration of the King’s Cross/St Pancras transport hub (started by the construction of HS1) continues to roll out exciting new projects such as the Google European HQ building and will soon be closely linked to the HS2-driven Euston station campus redevelopment and possibly also Crossrail 2, the route of which is to bisect Euston and St Pancras stations.

The Elizabeth Line (Crossrail 1) is nearing completion with multiple over-station developments at stations such as Tottenham Court Road, Bond Street and Farringdon becoming active or close to handover prior to the commencement of operations next year. Transport for London (TfL) is in the second year of its Property Partnerships programme, which is intended to involve the release of up to 50 development sites alongside and over their infrastructure in the next ten years.

At the same time, transport operators are looking for new ways to capture a larger slice of the value that they bring to areas with new infrastructure, and the Mayor of London has recently signed a Memorandum of Understanding with the UK Government to pilot a new Development Rights Auction Model in London.

This article will examine the different factors at play in this development boom around transport infrastructure. These factors include the changing approach of transport authorities seeking to release value from their real estate interests to help address funding costs for new infrastructure requirements, a shift in attitude towards development risk by such authorities and developers, the need to address the lack of housing supply and the advances in engineering and construction design.

Funding

The UK continues to require significantly increased investment in its transport infrastructure against a backdrop of multiple competing demands on the shrinking public purse. A growing part of the funding solution is to unlock value from the development opportunities created by the construction of new infrastructure, and in particular overstation or over-site developments (OSDs).

The Crossrail project has a target to raise more than £0.5 billion of capital receipts from its OSDs and a significant element of the funding model proposed for Crossrail 2 harnesses development opportunities and growth in value of adjoining real estate.

While HS1 did generate good returns from development on land acquired for that project for the Department for Transport, a far larger return is expected from the regeneration proposals that are being brought forward for the HS2 project. The Euston station estate has the capacity for six million square feet of mixed-use development that will reshape the Camden area of central London. At the northern end of the first phase of HS2 in Birmingham there is already 600,000m2 of new commercial, leisure and retail development under way or in the pipeline, focused around the new HS2 station at Birmingham Curzon. This could be replicated around the other main station sites at Manchester, East Midlands (Derby/Nottingham) and Leeds.

More recently, the Government has been considering ways in which it may be able to fund future infrastructure through the capture of increased value in land created by new transport hubs. It is well understood that proximity to public transport influences property prices. For example, the Jubilee Line Extension led to land value increases of more than 50 per cent. This land value capture would allow authorities to “pull forward” the land value benefits of public transport to fund current development. At present, much of this increased land value is won directly by savvy developers who snap up nearby properties and then build accordingly. However, the Spring 2017 Budget confirmed the Government’s support for a pilot land value capture scheme in London that would assist TfL in funding the infrastructure schemes, such as Crossrail 2, that the city desperately needs. This scheme, known as the Development Rights Auction Model, involves the integrated planning and consent to land use and density in a defined zone around a new transport hub, with land that benefits from this zoning being assembled (with the agreement of landowners) and auctioned to developers. The proceeds of sale are then split between the landowners and the transport authority. Landowners who do not wish to participate in the auction can still benefit from the zoning, but with a high planning levy payable. TfL estimates that this model could double receipts for public authorities compared with the existing planning levy regime.

Attitude to development risk

In order to take greater advantage of the returns that can be made through OSDs, the relevant transport bodies are showing a much greater willingness to partner with property developers and to share development risk and financing requirements.

For transport authorities, their role as operators of a safe and efficient transport network remains their primary duty but this is being supplemented by a secondary, yet still important, purpose of using their assets to create funding for new projects and reinvestment in improving existing infrastructure. OSDs are a very good example of this change in approach as the transport authority is accepting a long-term responsibility for supporting the new commercial developments being constructed on station boxes, and are designing their new station structures with additional loadbearing capacity to facilitate larger scale developments than have been seen in the past. Many of the Crossrail OSDs are following this model which has been factored into the station design arrangements from the outset.

This is a model that has been used successfully in other parts of the world such as the mass transit railway (MTR) in Hong Kong, which was constructed and is operated by the MTR Corporation Limited. The MTR is one of the most profitable metro systems in the world. One of the principles behind its development was the recognition that it is very difficult to provide rail services on a self-supporting basis and that in order to fund both the construction and operations it is necessary to exploit fully the property development opportunities created by the new railway. The MTR stations on the Hong Kong metro network are integrated into multi-million square feet developments of retail, hotel and residential complexes.

MTR will be involved in Crossrail as the concessionaire operating the rail service and is also part of the consortium involved in the operation of part of Sydney’s expanding metro network where it is seeking to employ its value-capture approach of maximising property development opportunities with network growth.

Housing shortages

Another increasingly important factor in development around transport hubs is the shortage of land available for housing supply. The Housing White Paper states that the Government needs to address the limited scope for high-density housing development in urban areas as part of the solution to the housing supply shortage. One of the ways identified for doing so is to facilitate this higher density development in areas well served by public transport. It is therefore anticipated that residential schemes will form a larger component of developments around rail stations. A good example of this is the 67 acre King’s Cross station area, where 2,000 new residential units are being created.

The Mayor of London, Sadiq Khan, has made addressing the shortfall in new stock to meet London’s housing demand one of his key priorities and has enlisted TfL’s help in bringing forward land for new housing from its portfolio of more than 5,000 acres of potential development sites. Network Rail has announced that it is targeting the release of a significant number of sites throughout the UK to accommodate 12,000 new homes by 2020. HS2 has already spawned masterplan arrangements for Birmingham, which include the creation of more than 50,000 new homes by 2031. There is also an expectation that the local planning authorities will not only support higher density residential development around stations but will require a material component of any future large-scale development to provide a significant number of new housing units.

The rise in the popularity of Build-to-Rent housing (BTR) is expected to attract further investment into large schemes around rail hubs. BTR developments are an ideal fit for those schemes: they are often designed on a large scale, to ensure management efficiency, and work best in sites which are well connected. Equally, BTR schemes can be built much faster than conventional for-sale schemes (as flats can be let faster than they can be sold), and the institutional investors active in the BTR market are natural partners for transport undertakings given their long-term approach and strong covenants.

Regeneration and placemaking

The regeneration of the King’s Cross and St Pancras station hub is a particularly fine example of how a once neglected urban environment that was dominated by rail infrastructure can be given a new lease of life. The restoration of the frontages of both stations, including the iconic station hotel now known as the St Pancras Grand and the modern expansion of the transport facilities, has been done very sympathetically and has been a catalyst for creating retail destinations for both passengers and local residents within the stations and externally.

The whole area has benefitted from the placemaking approach that has been adopted with the broad public realm facilitating a large offering of restaurants and bars that are complementary to the office and residential use. This has given the area the ability to attract such prestigious corporate occupiers as Google, Louis Vuitton and AstraZeneca. It is a successful model that the team at HS2, who are looking to bring forward Euston’s future redevelopment plans, will wish to learn from and emulate.

London & Continental Railways’ redevelopment proposals for the Leake Street arches at Waterloo station are operating on a similar basis, creating a strong sense of identity with the redevelopment of the railway arches to create a much improved retail and leisure offering in close proximity to Almacantar’s redevelopment of One and Two Southbank Place, and HB Reavis’s development of 1 Waterloo, leading to the Thames.

Rail operators no longer view stations as just transport hubs as they are now evolving to meet the needs of urban life. When launching the hunt for architects, developers and designers of the three new railway stations for HS2, Transport Minister, Andrew Jones, emphasised that “the winning bidders will need to ensure the stations provide the best possible customer experience”. Stations are destinations in their own right for passengers and visitors alike as demonstrated by the bars and restaurants in St Pancras station, which includes the longest champagne bar in the UK.

Planning issues

There are significant planning benefits to encouraging development around new and existing commuter hubs – reducing travel distances by private transport, making effective use of private and public sector land in sustainable locations and helping to secure the wider regeneration and growth of the local area.

The Government is keen to ensure that this is recognised at local authority level. In 2015 it consulted on possible changes to National Planning Policy to include an expectation on local planning authorities to “... require higher density development around commuter hubs wherever feasible”, with the aim of boosting new development and regeneration in “sustainable locations” and so reduce travel by private transport. The Housing White Paper again emphasises increased density around transport hubs.

Furthermore, in 2016, as part of its commitment to increase housing supply, the Government called for 20 councils to set out ambitious proposals for taking forward development opportunities around stations and offered assistance from Network Rail and the Homes and Communities Agency. Pilots have already been launched in York, Taunton and Swindon. The Neighbourhood Planning Act 2017 has recently recognised the need for wider compulsory purchase powers to facilitate regeneration around transport hubs. As a result, both the Greater London Authority and TfL now have the powers to compulsorily assemble the land needed for both transport infrastructure and the wider resulting development opportunity through a single compulsory purchase order.

Of course, building development over rail infrastructure comes with its own drawbacks for the planning authority. The standard design response of servicing a building through a basement car park will not normally be possible. Innovative solutions are needed to ensure that development essentials such as cycle spaces, plant and service access do not compromise the need for active ground floor frontages and high quality building design.

Construction/engineering advances

The safety of the existing rail operations will remain the paramount concern of the transport authority around whose station or infrastructure any development is taking place. Anyone connected with such developments will be familiar with the asset protection arrangements used by transport authorities to mitigate risk and safeguard the rail operations. Allied with this, the provision of adequate security (collateral warranties, insurances (including non-damage and non-negligence), bonds and guarantees) helps further reduce risks and exposure for all concerned. The market position on these requirements is fairly settled and accepted by those who regularly work with transport authorities, although the precise nature and extent of the development will be a relevant factor in determining what is required.

A settled landscape for contractual risk mitigation, while of course helpful, only goes so far. Advances in building design, engineering capabilities and construction management have also meant issues that have perhaps caused concern for developers in the past when developing in and around a rail environment do not create insurmountable problems.

Railways by their very nature have issues with noise, vibration, ventilation and heat extraction as well as other concerns. Where stations include Victorian infrastructure, there may not even be comprehensive registers of the infrastructure on a site. The benefit of creating new infrastructure or upgrading old infrastructure and integrating the design of such works with the design of new commercial developments (whether OSDs or alongside the rail works) is that issues can be anticipated and worked around using integrated design solutions.

Early and continued communication between design and engineering teams is an effective tool to deal with most issues. Careful planning of phases of works between infrastructure operators and development management teams can also allow complicated development works to progress while busy stations are kept open and operating to almost full capacity. The development of the Shard was achieved on the site of London Bridge, one of London’s busiest stations. The continued use of Euston during the HS2 works and the proposed major redevelopment will have to address similar challenges, but they are no longer seen as being impediments to successful redevelopment.

Conclusion

It is clear that the proliferation of developments around new and existing rail infrastructure will continue for many years. Transport authorities will need to capture value from development projects to help fund the increasing burden of new infrastructure requirements. Planning authorities will encourage such sustainable growth to make efficient use of the infrastructure and to help address the increasing demand for new residential projects. New transport links, improved urban realm and stations evolving as retail and leisure destinations will encourage more developers to seek new development opportunities around transport hubs and provide a welcome regeneration of these formerly tired urban sites.

Ashurst and the Built Environment 

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The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying it to specific issues or transactions.

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