Urban renewal projects are a recurrent topic in this blog. This was the last post about the redevelopment of Midtown Manhattan around the Penn Station.
The FT reports of the inauguration of the redeveloped 1930s era Battersea Power Station complex in London after a £9 billion regeneration project that would contain homes, offices, and shops. The 42-acre site is redeveloped by Battersea Power Station Development Company, which is owned by a Malaysian Pension Fund. The project has been under development for nearly 40 years since the power generation from the plant stopped in 1983.
A brief description of the development,
The 42-acre site, which includes a number of residential and office blocks as well as 250 shops, cafés and restaurants, a theatre, hotel and public space, as a “new town centre for London”. The building’s old turbine halls have been converted into an upmarket retail space — with luxury brands such as Cartier and Rolex, alongside Adidas and Superdry — that takes up the majority of space on the ground floor. With Westfield shopping centres in the west and east of London, the former coal-fired power station will become the southern point on a triangle of malls, with the West End nearby...
Apple has taken six floors of offices in the renovated power station in what is one of the biggest leasing deals in London in recent years... Above Apple’s offices, the building houses 254 residential apartments and a roof garden. One of its four white chimneys, a legacy of its days as a working power station, has a glass lift to the top that will be open to — and paid for — by the public. The original power station started producing electricity in 1935. The art deco architecture of the time is well preserved in one half of the building and most clearly seen in a control room that is being turned into an events space. Its panels once controlled the power for a fifth of London, and include a board labelled Carnaby Street 2 that once linked to Buckingham Palace. The other half of the building was added after the second world war, by which time architectural trends had moved to the 1950s-era steel and “space age”. This corresponding control centre will be converted into a 1950s-themed bar.
This is the short history of the redevelopment efforts,
The plans for the power station site, which is owned by a consortium of Malaysian investors and developers, will finally see the building brought back to use for the first time since the power was cut off in 1983. In the past, the building has attracted owners from Hong Kong, Ireland and the UK, with various aspirations to turn it into a theme park, hotel and even the base of a 300m glass chimney. But the site has largely remained untouched over the decades as its owners have either gone bust or sold out — in the 1990s it was even left without a roof for a period after the project ran out of funding. The Malaysian-pension fund backed consortium bought the site in 2012 from its receivers for £400mn. The new project has already attracted criticism over its lack of affordable housing, fuelling concerns over the number of empty flats built along a stretch of the Thames that is already blighted by soulless blocks... planning consent for the remainder of the site, which had previously featured “some really very large buildings”, had been updated to give greater flexibility in terms of future use, building shape and size, “which is useful at a time when the developers’ crystal ball is a bit foggy”.
1. Such projects are always long in cooking and take a very long time to get cooked. It will take-off only when there is a confluence of policies, developers, market prospects, social acceptance, and political support for the project. It's only natural that it takes long years for such confluence to materialise.
2. Not just the financial life of these projects (time to recover investments), even the project development phase span multiple business cycles. Besides, the project revenue streams and their revenues are uncertain at the beginning and emerge only over time. This demands visionary investors with very high risk-appetite. The high risk nature also means that the patient long-term investors who wait out should be allowed to reap high returns.
3. Infrastructure or other funds, with multiple investors and long investment time frames, are best placed to assume these project risks. Besides they are also more likely (than large property or infrastructure development companies) to hire professional managers and be comfortable with arms-length ownership. Since their incentives are aligned towards maximising value capture, they are likely to procure the best professionals with the capabilities to market the project aggressively by forging networks and creating eco-systems (critical to maximising value capture). Such arms-length relationships are generally difficult for large property or other infrastructure contractors.
4. Given the long gestation and the tenuous viability of these projects, especially in their development phase and early years, it's natural that these projects will involve periodic renegotiations and requests for public support. Governments and the society at large should be open to considering these requests. The environment of vigilance enquiries and media trials are a big deterrent to such projects.
5. The uncertainties and long-gestation mean that such projects invariably involve multiple takeouts, even during the development phase, involving different categories of investors. So flexible and complex financing structures are essential.
6. Urban planning instruments and property tax concessions are critical in shaping the financial viability and the development trajectory of these projects. Since unlike public finance investments these instruments do not involve budget allocations (though they involve revenues foregone), governments have significant flexibility in deploying them. And since they generally involve concessions on recurring revenues and the value capture on the property investments is generally back-ended, these are financially significant for the project.
7. Apart from planning instruments, infrastructure connectivity public investments are critical to their success. In fact, all the aforementioned examples from London revolve around the old metro railway stations. The metro station and its connectivity provides the anchor around which the entire redevelopment happens.
8. Such projects invariably create a vocal constituency of opponents who mobilise political support against it. While the majority of population would welcome these projects, their diffuse and weak support is more than overwhelmed by the concentrated and loud opposition by the small minority. The strengths of the opposition and support waxes and wanes over time. The developers should have the appetite to ride out these political cycles.
9. The scale and very nature of these projects mean that they are less about infrastructure development but more about branding and marketing, creating eco-systems and jobs, and catalysing activities that contribute to the development not only the project area but of its larger conurbation. This cannot be undertaken by non-local project entities, but have to be led entities grounded in the local government and community. This is an important reminder about one of the important weaknesses of the railways station development projects undertaken by Government of India through a distant central government entity called RLDA as primarily a station rebuilding project.
10. Finally, these projects require high quality and deeply committed long-term leadership, with the vision to plan for and wait out business cycles.
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