The Financialization of property and the dis-economies of agglomeration - PowerPoint Presentation

Slide1

The Financialization of property and the dis-economies of agglomeration

Prof. Adam Leaver

Co-Director SPERI

University of SheffieldSlide2

Agglomeration through property-led regeneration

Since early 2000s Manchester pursued a strategy of property-led regeneration, against a backdrop of a strategically & operationally hamstrung past (Folkman et al 2016)

Explicit aim: to cultivate the forces of agglomeration; create urban density and scale & integrate cities economically w/their surrounds:

reduce market ‘frictions’; improve efficient allocation of labour & capital; create scale economies; create thick skilled labour markets & nurture high VA complementarities (Fujita and Rivera-

Batiz

1988), create innovation spill-overs & specialisation etc.

Outcome = higher productivity within agglomerated cities and dispersal of economic growth & prosperity to surrounds; centrifugal effects

Embedded in 2009 Manchester Independent Economic Review, 2011 creation of the Greater Manchester Combined Authority, 2017 Greater Manchester Spatial Framework: embedded developer-led regeneration; but also increasingly financializedSlide3

Build to rent: state co-creation of a new asset class

At the same time, a new asset class emerged, underwritten by the state:

Background 1988 Housing Act: deregulation of rents and tenancies; 1996 introduction of Buy-to-Let mortgages for small investors.

Attracting institutional investment to the sector became an explicit policy priority during the late 2000s/early 2010s:

Perception: Better quality of management, longer leases, scale efficiencies

2012 Montague review: (pension fund) investors would benefit from index-linked rents in line with their liabilities; residential investment offers valuable diversification

Series of incentives to convert diffuse market of private buy to let landlords into a new asset class: 2012 HCA Build to Rent fund £200m; 2013 HCA Build to Rent fund 2 £1bn; 2014 £3.5bn debt guarantee scheme; Home Building Fund £3bn Slide4

What is build to rent?

Development of three phases: purchasing & consolidation of vacant units post-crisis; multi-use units purchased for the PRS in development phase; stock purpose built for the rented sector, sometimes using a forward funding approach.

Aggregators of PRS stock are increasing in numbers (

eg

Sigma): once developed and stabilised, these portfolios will be sold to the institutional market through large portfolio sales or corporate transactionsSlide5

BUILD TO RENT UNITS BY REGIONSlide6

The promise of build-to-rent

Immediately attractive to a property-led growth strategy

Bring homes to the market more quickly than traditional “housing for sale” schemes, build agglomeration more rapidly (Property Development Rights = faster planning due to S106 concessions, no minimum unit size/affordable housing constraints

etc

, Silver 2018).

Diversify the mix: needs of low and middle incomes with market and discounted market rental homes accessible to many more than homes for sale (McWilliam 2018)

Solve a housing supply problem; also meeting unmet needs – young, mobile people who don’t want the responsibilities of ownership

Respond to central govt pressure to boost PRS sectors, to ‘provide longer-term ‘family-friendly’ tenancies’ – appeal to institutional money to capture a greater % of the generational spend.Slide7

Build-to-rent: cash idling & regional extraction

Where does the rental income go?

Cash-idling: Manchester-based [anonymous company] (major

BtR

planning & construction arm): with a single shareholder

Modest returns, but cash generative: £20m cash in the bank, but more going on – difficult to work out net assets when there are seven figure creditors (also owned by the same person).

Approx

40 active firms, £60m cash, and that’s before we consider the undisclosed subsidiaries of each.

i.e

the rents makes one individual very wealthy, but inhibits city multipliers: inefficiencies of property-led growth?

Regional extraction: complex financing arrangements of global financial capital, which suck money out of the region:

eg

Abu Dhabi United Group, routing investment through Jersey based Loom Holdings in NE Manchester (Silver, 2018). Slide8

Relation between scale/density and productivity is weakSlide9

Centripetal vs centrifugal cities

Something Soviet about Manchester’s growth model

Manchester = a centralised, regional state attempting to catch up with its major competitor by mobilising resources from its hinterland

Like Soviet system, unable to move from

extensive

to

intensive

growth (Harrison 2002); no reciprocal benefit for its hinterlands.

Extensive = centripetal: suck-in workers from hinterlands to (higher productivity) employment in urban sector.

In Soviet Union - volume to improve under-utilised factory capacity; in Manchester mobilise young as feedstock to maximise occupancy potential for under-utilised Brownfield housing development.

Intensive

growth = productivity improvements from given factor inputsSlide10

GMCA

GFCSlide11

Conclusion: Dis-economies of agglomeration?

Cash inertia and financial extraction mute the Keynesian multipliers which might otherwise stimulate patterns of consumption conducive towards regional productivity improvements

Property led regeneration may ’put the cart before the horse’ – it increases the price of land to a point which dis-incentivises/crowds-out start-ups and entrepreneurial activity; & crowds-in further property speculation

It may push up the price of infrastructure development & service provision,

esp

relevant if

BtR

becomes geared towards capturing longer generational spend & GMSF projections about 200k new jobs

BtR

also is a form of regressive wealth redistribution: if people rent longer, they build up less capital – and the higher the rent, the longer they have to rent before they can afford a deposit: implication for secured lending in future.