New towns , infrastructure and the Growth Corridor - report part three

Image: Milton Keynes Central - looking towards the main station entrance

In the third part of the 'New Towns, Innovation clusters and Growth Corridor' report with content taken from Future Cities Forum's discussion at the offices of Milton Keynes Council, we focus on the potential legacy of East West Rail and the issues around private/public investment in infrastructure and real estate.

Contributors to this part of the report were the Leader of Milton Keynes City Council, Cllr Pete Marland, England's Economic Heartland's Managing Director, Naomi Green and Will Gallagher, Strategy & Sponsorship Director at East West Rail, Tom Elviss, Fund Manager and Millie Hitchins, Asset Manager, Colombia Threadneedle Investments.

Pete Marland, Leader of Milton Keynes Council, spoke about the current restrictions on funding for connectivity around bus and rail which long term may hinder growth in the Corridor:

'In global terms, it is actually counterproductive. Sometimes in this country we forget that we're competing for dollars and yens and other currencies, and they're put off by our system. NBC Universal came to see me (about the planned theme park in Bedfordshire) and talked about running a bus from Milton Keynes Station to the doorway of Universal, which is actually a planning obligation. And I had to tell them, as Leader of a council in this country, I cannot run a bus service. That is bonkers. And the fact that I can't take it at my own risk to spend thirty million quid on a railway station is utterly bonkers too. And I think we accept in this country too often, that some progress is better than proper progress.'

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Image: East West Rail route courtesy of EWR

England's Economic Heartland's Managing Director, Naomi Green, was asked her view on why barriers to infrastructure funding continue to prove frustrating:

'My first point is actually around the fiscal situation, just making funding available is such a challenge for us. But it's not just the fiscal situation. I think actually some of that is about how we need to move forward as a region. I certainly have learned a lot over the last couple of years of working at the Supercluster, which has absolutely changed the way that this government works for this region.

'However, the perception that there is value, leads to the thinking that there are pots of gold that we can somehow dig up. And I think it's a really big challenge. So not only on East West Rail, but there are a number of examples, the London Road level crossing in Oxfordshire, the eastern entrances of Bletchley and Cambridge, and the slightly isolated Cambridge East. But with all these things like the Milton Keynes Mass Rapid Transit, which there are constant conversations about, there has to be third party funding. And yet, how we unlock that is quite complex with the Treasury. And so I think there's a really big issue there.

'Secondly, we are working in a kind of era of massive change for local government, not just the organisation in Oxford, Cambridge and Hertfordshire, but also devolution. I think that has then had an implication on funding availability, because there's so much focus in the Department of Transport from a transport perspective on integrated settlements. So we've kind of got our hands tied behind our backs anyway. We work within that environment daily, but we're missing things like Universal.

'Universal will welcome eight million new visitors to this region in five years' time. 20,000 construction workers are going to have to go and operate in that site in the next five years. We've got 140 coming next week. And that's the start, they're coming already. And yet, we haven't got a mechanism for working with that. And we're opening to the world this new opportunity. I think that's where, as a region, we need to sort of really step in. And it's not just Universal.

'I actually think the thing that we are doing really well, but need to do much, much better, is leverage the voice of the private sector, because it's where the government is so responsive to it. So we saw the way the Supercluster has formed over the last four years, and they can open just momentum so quickly. And if you think about, even from a development perspective, I think there's an opportunity to really strengthen that voice.

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Image: aerial view of Campbell Park at Milton Keynes - courtesy miltonkeynes.co.uk

Pete Marland commented further on attracting public and private investment to Milton Keynes:

'So the government is very receptive. However, the conversations we've been having around new towns and things, in some ways, it's not the government, actually, it's generally the civil servants, is that they are stuck in a very rigid way about how they think about things. So for us, they are saying, in the city centre, they want us to attract investment from the organisations that own the land and who want to build these houses, right next to a train station. They tell us who our anchor employer is going to be - the Crick Institute perhaps, or the global headquarters of Microsoft which should move here, or Google. Outside of a very small square patch of London, which is essentially Euston, or King's Cross, the idea that global headquarters are now just going to plug down here - it's a zero-sum game for them, in one respect. What they want to see is, for this ten million pounds, one hundred million pounds, we will deliver 5,000 houses and deliver you 6,000 jobs with this anchor company. And again, going back to why Milton Keynes faces a challenge, is the vast majority of our jobs are with SME businesses.

'We're not Bracknell, for instance, which is a great place, but since the pandemic has really suffered with large-scale data-driven companies downsizing their operations and moving them out. Milton Keynes is a strong and flexible economy because its very basis is strong and flexible. But the civil servants just want this sort of, fill in this form, tell us how many houses it's going to be, tell us how many jobs it's going to be, who it is, and so we can get a big flashy, sort of big announcement. But it's a little bit fixed and actually is not really responsive to how the global economy is growing around individuals having great ideas that can then transform into scale-up businesses and then, in all fairness, probably sell on to Apple or Google for the intellectual property.'

Naomi was asked what the current temperature is within the private sector for investing in infrastructure projects. She said:

'I think some of the big issues are actually about having a level of certainty to give those financial institutions giving them the appetite to invest. And again, it comes back to the level of decision-making that goes on in Whitehall. And so therefore, trying to leverage private sector funding into some sort of combination is not impossible because the certainty's not there because there's no control over the decision-making.

'But one of the things that I think East West Rail has done really, really well, is to look at the whole-scale benefits which is so much more than a transport scheme, and actually not only to say these are the benefits, but then proactively seek to leverage those benefits. So there is a strategic partnership with ten universities across the region to look at skills, and I think that's now rolling out to the college groups too. East West Rail is right in the centre of kind of mobilising the narrative around this place.

Will Gallagher of East West Rail insisted that the planning system in the UK still remains difficult in building infrastructure and housing:

'This is where getting through the planning system is a challenge. There are government reforms in that space and we're doing everything we can to move through it. It also gets you to where we are currently designing stations. And frankly, though Bletchley East Entrance should be an obvious thing, in other places, the type of station you build is going to significantly determine the density of development you get around it, and all of those things. There's a danger you do that in isolation. And at the moment, there aren't really formal mechanisms for not doing it in isolation. So I think the point I was trying to make is that you end up having to, basically, to Naomi's point, use goodwill, and with the networks you've got, to try to get to what we think the station is going look like at Woburn Sands, or at Camborne. And you end up having good conversations, and you get to, whether you build a high street station or a pathway station, and it actually significantly determines the outcome you're going get in this part of the world.'

Pete Marland added:

'Institutional investors are never going to invest if we are talking about connecting up three of the most productive city economies in this country, Oxford, Milton Keynes, Cambridge, and a very productive area around it, Silverstone, etcetera. In Italy, they are just about to build an extension to their high speed rail line that will link Rome and Pompeii. Now, that is sort of like a high speed rail line that will take you from Rome to Pompeii in 45 minutes. It is a railway between two of the most productive cities, going through another most productive city. But if we were to go to an institutional investor and say, we've got a great idea for a private rail, that will deliver tonnes and tons and tons of return, really, they would say, that's great, but what about the Vale of the White Horse? I know we can have nationally significant infrastructure things which could kick up such a force and delay the project for 10 years. Why would I bother? It's about risk, isn't it? Risk management and all of those things. We should not. As a country, it's a bit worrying that we rely on goodwill and MPs having words and people's ears, and we do, whereas actually in most other places the certainty comes with that's the decision, it's going to be done, let's get on and invest.'

Image: Tom Elviss of Columbia Threadneedle Investments talking during Future Cities Forum discussion at Milton City Counci

Continuing the discussion around investment but moving onto funding of real estate in Milton Keynes, Tom Elviss, Fund Manager at Colombia Threadneedle Investments, joined the conversation to talk about the complexities of the planning system:

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'You're exactly right, the nuances of the UK planning system are one of the biggest frustrations we face across every asset class. We face new build development, trying to change use of buildings, and what's great to see here today is we're sat in front of a council that is actually very flexible on planning, and they actually want to have development within their own unitary area.

'As a starting point, that's a fantastic place to be, because in a lot of parts of the UK, you don't have that starting point. But at the end of the day, if we look at our site at Grafton Gate, in Milton Keynes, that sits in a pension fund, it's pension fund money. We want to bring that site forward, and we've got a unitary authority who wants that site coming forward. But after you've gone through the planning process, which we might be able to hear a lot quicker than other places, it's a deliverability point, and that's one of the biggest frustrations. It was touched on earlier, just the cost of materials and buildings post-2022. We've actually got an economy in a built environment now where it's very difficult to actually replace buildings. The economics don't stack on a rent and yield basis or a cap value per square foot basis.

'At the same time, in the residential sphere, we've had more, for the right reasons, for health and safety reasons, we've had more regulation coming through. So there feels there are barriers to investment, and that is a frustration on certainty of investment. But I think the bigger challenge, if you take that further forward, is the UK real estate market is going through a big change. Defined benefit pension schemes are exiting the market. That was the patient capital in the space. And what has been replaced every year is more and more international capital. And that international capital generally doesn't really want to get involved in planning, because UK planning is quite convoluted compared to an international comparator. And it's also, geographically, it can choose where it wants to invest.

'So to your point, if you can go to another country where someone will just sow in an area of land very quickly, you can get on and develop your real estate very quickly. That's always going to be more attractive, unfortunately, than the UK with the impediments we've got to development.'

Tom was asked whether Colombia Threadneedle is seeing this type of investment as a one-off in Milton Keynes or whether the city as a future as a rich area for investment?

'We invest throughout the UK. I think what's going to be different for what we don't, 10% of our business, maybe less, is taking assets through the planning process in terms of change of use or large-scale development. You know, we're changing user classes for retail warehouses all the time, to get from a pet food shop to a home bar or whatever it is. So I think understanding the unitary area you're trying to develop in or go through a planning process will frame the efficiency of your capital being invested in that area.

'So, you know, on that basis, given we're looking at a city which wants to grow and where we've got a planning authority who seem to be quite pragmatic and want development, that should make it a more attractive place to invest. The counter to that would always be the capital values at the end of your development. Does that make it efficient to invest our investors' money into that city? But certainly the friction of where you're trying to do business does change from area to area. It does impact on your appetite to invest into that area. So I think having a tied-together vision and a tied-together, planning authority and planning process, which is going to be efficient is attractive.

'Manchester did fantastically well, you know, 20, 25 years ago, and you look at the change of a Manchester skyline there, centrally controlled, quite powerful planning authority, that's driven the development of Manchester and it's let it grow and it's changed the skyline entirely. That is attractive as compared to some unitary authorities which have literally closed investment.

'But our whole investment window is getting narrower and narrower and narrower just on the basis of rent and yield. Where can we actually invest and make money for our investors? And, you know, for the fund that holds the land we've got, where the retail warehouses are in Milton Keynes, it's a pension fund. We're not a loose capitalist trying to make a massive profit. We are, you know, we stewards of pensioners' money and we're trying to get the best return for those pensioners.'

In addition, Millie Hitchens, Asset Manager at Colombia Threadneedle Investments commented:

'I think kind of just taking that back to the site that we have at Grafton Gate, obviously I've worked on it for five years. We started to look at different types of development on that land. Toys R Us went, you know, bust and we knew it was a very strategic site. You could get to London in 30 minutes. You're obviously in the middle of the Arc. There were so many positives about it when I started looking at the development aspect of it.

'We looked at one point doing a life science scheme. I didn't think the timing was right. We didn't have a university coming through. The train line was moving. COVID happened. The office values dropped significantly and it made us rethink what we were going to do on the site. And I think we're both still very passionate about, Milton Keynes. We've had offers to buy the land, lots of different things, even to reuse it as a retail warehouse, which I know that wouldn't be a strategic idea for you. I think we believed in Milton Keynes as a destination. I think as a young person, you can get to London in 30 minutes. House prices are a lot cheaper. You've got lots of countryside around you.

'I suppose the issue is when you come into the town, where is that atmosphere? Where is that kind of community? And it doesn't happen. And it's from my perspective, coming into it, I was like, well, we need to create that. And how do you create that? You need people living in a town. You need people to be able to go to the restaurants, to the shops, et cetera. And I think that's kind of the basis of where we came to with our development of having a residential-led development through an outline planning application that has ultimate flexibility, to be honest, because, you know, the market has changed significantly.

'Over those five years, we've had the Gateway 2 come in. Bill costs are actually astronomical. We did some soft market testing before 2023, on a residential-led scheme. We've done some more market testing now. And actually, the narrative has changed because of the viability. The 30 storeys doesn't stack up. You know, it needs to be taken down to have that flexibility. And we hope that this is going to be a phased development. And as time, hopefully as the market improves, that we can build the towers and they will come. But it just shows how unstable everything is at the moment.'

Part four of our report will be published shortly.

Image: Station Square, Milton Keynes