Rail-led property developments: a catalyst for growth
The rail industry is working with property developers to deliver economic development around stations. A report from Landor’s 2014 Rail Stations & Property Summit.
Railways and property have long enjoyed a symbiotic relationship: Railway improvements generally stimulate development in adjoining properties and boost land values, while rail-based property schemes usually puts more traffic on the tracks. It’s a win-win situation for both parties.
Landor Links recently hosted the 14th Annual UK Rail Stations & Rail Property Summit in London. The event brought together a wide range of key players in the rail and property sectors to discuss both on-going and planned rail-led development projects.
These are some of the main themes discussed:
Should it ever come to fruition, the proposed transport interchange/urban regeneration planned for Old Oak Common in West London, will be one of the largest projects of its kind contemplated. Sir Edward Lister, GLA’s Chief of Staff and Deputy Mayor for Policy and Planning, informed delegates that TfL would require a mayoral development corporation (MDC) to drive the scheme forward, the first time one has been used since the Olympics.
The huge Old Oak Common transport hub would connect HS2 with Crossrail, the Great Western Mail Line (GWML) and Heathrow Express. The area is criss-crossed by several other lines, and the complex would probably link in the North London Line (NLL), the West London Line (WLL), and the Bakerloo and Central Tube lines as well, so the wider catchment potential is enormous.
“Old Oak Common will have six high speed platforms and eight conventional ones, and serve around 250,000 passengers a day, compared to Waterloo’s 267,000,” said Lister. “This gives some indication of its size. The core site will occupy 185 hectares, but the wider Park Royal City regeneration project will cover 968 hectares, easily dwarfing both Canary Wharf (110 hectares), and the Olympic Park regeneration area (267 hectares). The associated economic regeneration could add £6 bn to the UK economy.”
Funding details are still somewhat sketchy at this stage, but they should include borrowing against the enhanced land values the project is expected to realise.
For Crossrail, Head of Integration, Sam Richards, reported that tunnelling work on the £14.8bn scheme was now nearly half complete. “Crossrail is not only Europe’s largest infrastructure project, but it comes within Europe’s top ten property developments as well. It will be the first UK rail project to integrate stations with OSDs (oversite station developments) and with the urban realm. Our impact studies show that by 2021 it could add 18% (or £5.5bn) to residential and real estate property values within distances of one kilometre from stations.”
Crossrail has identified 13 OSD sites (including the main line termini at Paddington and Liverpool Street) and is planning to set aside over 3 million square feet of space for office, retail and residential development, including provision for 57,000 homes. Development, however, is not confined to new stations, as many older ones will be upgraded.
Crossrail is receiving £6.7bn in direct funding, but TfL is responsible for an additional £5.2bn from the private sector, and DfT is expected to provide £480m from the same quarter. The main private sector contribution will come from the Business Rate Supplement (£4.1bn). Surplus land sales are expected to raise £500m, and the Community Infrastructure Levy will add another £300m.
With 2,500 station sites, Network Rail ranks as one of the UK’s largest property owners. “We carry more than half as many passengers as we did ten years ago,” explained David Biggs, NR Property Director. “However, not all people visiting stations use trains: At Euston, for example, we found that 20% didn’t. Stations are used for a wide range of different purposes, for shopping and leisure, and for other purposes not directly connected to rail travel.”
It was also noted that passengers broadly fell into three main categories – business, leisure and commuter – and that there are significant differences between the needs of each group and the dwell times they spend at railway stations.
Network Rail established Solum Regeneration with construction and property company Kier Group as a 50:50 joint venture in 2008. It has a remit to deliver commercial and residential developments around station sites, as well as to improve station facilities. To date it has delivered projects in Christchurch, Epsom and Walthamstow, and has plans for Redhill, Haywards Heath, Twickenham and Guildford.
Railway viaducts – as well as stations – can also provide lucrative sources of revenue, and Network Rail has major plans for ‘under the arches’ developments near Manchester Oxford Road, and at London Bridge stations.
The relationship between railways and property is a two way one: Just as new and improved rail services can stimulate property developments, the reverse can also be the case. Rail commuting is a good example of this:
“The modal share or rail commuting has increased in all the English regions, and is not just confined to London and the South East,” Credo business consultant Matt Lovering told the meeting. “Rail commuting into London is dominant and increasing its modal share, and over the last two decades has been partly driven by the disparity between relative regional cost of living differentials. For example, in real terms the cost of living has increased in London, but decreased in the South East, making it financially advantageous to commute between the latter and the former.”
Lovering said the trend is likely to continue, and that the number of rail journeys in London and the South East is forecast to rise at 2.5% each year between 2013 and 2038, taking the number of passenger kilometres from less than 30 billion to around 50 billion.
Philip Beer, a partner with Burges Salmon, examined the numerous options available for funding rail and property developments. One idea, new to the UK – though it has been around in the USA for decades – is Tax Increment Funding, or Financing (TIF). This enables local authorities to borrow money to finance infrastructure projects by securing debt on the future tax gains expected from enhanced property values. Only two UK TIF schemes have appeared so far; in Glasgow/Falkirk; and (to partly fund) the Nine Elms redevelopment (which includes TfL’s Northern Line Battersea extension).
TIF could be used for Crossrail 2, though as a method of finance it would probably be unsuitable outside London, since it depends on soaring property demand and rising land values.
Not all rail-led property schemes are on the same massive mega-scale as Old Oak Common, or those envisaged by Crossrail. West Yorkshire’s Metro proposals are far more modest:
The authority has teemed up with Commercial Estates Group, a development company, to open two new stations (at Kirkstall Forge and Apperley Bridge) on the Leeds-Bradford Forster Square route. The £17m project will get £10m from the DfT, with developers funding the balance. There are plans for more than 1,000 new homes, and 120,000 sq feet of retail and leisure development. However, even a relatively small project like this can encounter problems:
“We’ve opened more than 20 new stations since the 1980s, and two since privatisation,” explained Metro Development Director David Hoggarth,” but nowadays, it’s no easy task. The rail industry is not incentivised to open new stations. The process is time-consuming, costly and immensely bureaucratic, with no less than eight Network Rail Grip stages to negotiate.”
Finally, Dr Ying Jin of Cambridge University gave the conference an international perspective on station developments: “The Chinese high-speed trains may have shrunk journey times, but the stations have been the weak link and proved poor catalysts for urban land change. Many are sited on the city outskirts, and they have failed to attract high-quality office and commercial development in spite of tremendous urban growth.”
MTR – a railway with an impressive track record
When it comes to rail-led property developments, Hong Kong-based MTR is probably in a class of its own. It also runs one of the few truly profitable public transport systems in the world.
MTR (Mass Transit Railway) Corporation was established by the Hong Kong government in 1975, and was partially privatised in 2000 (the state still holds a majority 77% share). It runs nine rapid transit lines, the Airport Express, an LRT system plus some bus feeder services. It carries five million passengers a day.
MTR also operates metro style services in Sweden, Australia and China, and shares management of the London Overground with Arriva. The company has submitted bids for the Crossrail, ScotRail, Thameslink and Essex Thameside rail franchises in the UK.
The key to MTR’s success has been the integration of rail with a wide property portfolio, ranging from residential and retail to hotel and office developments.
CEO Jeremy Long, explained MTR’s successful business model: “MTR acquires the land rights, prepares the overall design of the scheme – including that of the railway – then goes into partnership with development companies to develop the space. MTR oversees the construction, and shares the profit when the property is sold, though it may retain the estate management rights.”
MTR has 51 developments at stations and investments in 13 shopping malls. Its farebox: property split is roughly 50:50. Long said that although raising capital in the private sector would always be more expensive than from public sources, this was offset by better private sector know-how and management.
“We manage to run a modern network without any subsidy, and the government has benefited as we have contributed land premiums of £8bn, and profits/value from MTR of £10bn.”
‘Metro-land’ & more
The old British Metropolitan Railway enjoyed a unique privileged status: Unlike other railways, it was allowed to retain surplus land, and this enabled it to set up a separate company to develop housing estates in the leafy home suburbs along part of its route. This was how ‘Metro-land’ came about.
The Japanese have taken this concept much further: Historically, its smaller private railways were barred from competing with the much larger nationalised state concern, and they were forced to diversify. Today, around 16 urban railways are involved in a wide range of real estate activities, including residential, retail, transport, manufacturing, construction and educational services.
These small Japanese railways are generally profitable and require little if any subsidy. Rail often counts for less than half the total turnover, and any losses on this side will be more than offset by profits made in the non rail sector.