You don’t have to look very hard outside London to find economic stress. However, in an Estates Gazette poll, published last December, the perception of the North East’s future economic performance was worse than other regions. In the survey, Newcastle and the North East were predicted to be the number one not-spot this year.
This seems to fly in the face of a relatively upbeat mood among the region’s developers and agents. So what are the fundamental economic factors causing such low expectations for those peering in?
One of the EG poll participants, Nicholas Barnes, head of research for London-based Chesterton Global, says: “There is no doubt about it – the North East comes out worst in terms of economic performance measures, such as unemployment and social deprivation.”
It should be stated that Barnes’s main focus is residential. However, the fundamental data he refers to affects the whole economy. The region has some of the worst unemployment statistics in the UK. According to the Office for National Statistics, unemployment in Middlesbrough stands at 9.9% and Tyne Bridge at 8.1%. House prices have the lowest growth, and labour productivity is more than 8% below the UK average.
While high unemployment is often a boon to sectors such as call centres, it has failed to have an effect and, at 1.6%, the region has England’s lowest projected regional growth between 2012 and 2016.
A predominant concern about the North East is its reliance on the public sector for economic activity. Up to one-third of all jobs in the region are public sector, and as much as 40% of its economy is reliant on it – at a time when government cuts are expected to be severe.
Alexandra Jones, chief executive of think-tank Centre for Cities, says: “The North East’s challenge in the coming years will be to offset the impact of public sector job losses in a region in which the public sector is such an important employer.”
An obvious example of those swathing cuts is the regional development agency, One NorthEast, which officially closed at the end of last month.
“Almost all of the regeneration programmes have been scrapped by the government for all regions,” says Kevan Carrick, principle of JK Property Consultants and member of the G9 lobby group, which is seeking to promote a joined-up approach to regeneration.
He adds: “Gone is the public subsidy to arrest physical, economic and social decline. This is replaced by a range of finance which is not as much and is based mainly on viable developments.”
The effective removal of gap funding will have a disproportionately large effect on the North East, which has a large number of regeneration projects.
“Newcastle Science City, for example, will have to find new ways of securing funding,” says Joanne Warren, associate research director with BNP Paribas Real Estate in London, who also participated in EG’s poll. “It will not stop it, but it will have an impact. A lot of projects will not happen without public funding, purely for viability reasons.”
Overlying this regional weakness is the national picture. Business investment is low and consumer spending weak. The European sovereign debt crisis continues, as does retail’s battering. Lending levels are low, and many banks are preparing to cut their budgets even further, due to continued exposure to toxic or at least dubious debt. This means banks will focus lending on regions with the least risk.
Chesterton’s Barnes says: “For the past two years, we have seen a decline in household income, and the housing market is tough. I am a glass-half-full type of guy, but I do wonder where a big delivery of growth will come from.” He adds: “Any ripple effect will be felt proportionately more in the North East.”
The North East scores very low when it comes to unemployment and productivity, but Adrian Morrison finds a high level of confidence among the region’s property players.
The drive to stimulate growth
The North East’s property community does not have such a bearish view as those outside the region. This is largely due to some recent significant wins.
Nissan Motors has committed to produce a new model at Sunderland, and County Durham won the £4.5bn Intercity Express Programme.
“Everyone is aware of the doom and gloom, but there are plenty of initiatives starting that just need time to come on stream,” says Trevor Cartner, chairman of Tees Valley-based developer Helios.
Cartner adds: “I do not think the outlook is particularly poor. Had we had this conversation at the end of last year, I would have agreed, but since the turn of the year there has been a lot of optimism. But my views are flavoured by Wynyard Park.”
Wynyard Park is Helios’s joint venture regeneration with JC Musgrave of the former Samsung electronics factory, off the A19 in Tees Valley. At its peak, Samsung employed 780 people. When Helios finishes constructing Asda’s distribution hub (see p50), the site will employ more than 2,000. The developer, which has just secured an 85,000 sq ft letting to chemical manufacturer, Huntsman, has now let 93% of the scheme, and is considering further development.
Manufacturing is the leading light in the economy, and one that is particularly strong in the North East – reflected in Nissan’s choice of its most productive global plant in Sunderland to produce its new model.
“What people are missing is that there is a bit of a renaissance in manufacturing,” says Cartner. “For car manufacturers, logistics costs are huge, and wages are rising in places such as Poland, making this region more competitive.”
One local automotive industry supplier, Stockton-on-Tees-based Nifco UK, is now converting 40% of its enquiries, up from 10% last year.
To boot, County Durham won the £4.5bn Intercity Express Programme, a government project to deliver the next generation of high-speed trains. Hitachi will start development of a huge assembly plant in Newton Aycliffe as early as next year, with the first engine completed by 2016.
Aside from “organic’ regeneration”, which does not involve government intervention, existing regeneration projects will be assisted by the government’s City Deals initiative.
At the end of last year, Newcastle was told it would become an English regional “core city” as part of City Deals. The city was already part of the English Core Cities Group – a regional city economic development alliance. The designation means it will be able to set and collect business rates for its own use.
An aim of the City Deals programme is the creation of an accelerated development zone, where £115m worth of regional authority infrastructure investment will be used to kickstart regeneration projects in Newcastle and Gateshead.
The ADZ incorporates Newcastle’s Science Central scheme, the Stephenson Quarter, Central Station, East Pilgrim Street, as well as Gateshead Quays and the Baltic Business Quarter. The council reckons it will deliver more than 3.2m sq ft of office development, hotels and retail space, as well as support university accommodation and contribute about £700m annually to the regional economy.
“It will be the answer to Newcastle’s development hiatus,” says Ian Ward, head of regeneration and property at law firm Dickinson Dees. “The council has been unable to secure bank funding, but has had more success using the Prudential Borrowing Scheme. “
He concludes: “It is a timing issue. We are right in the middle of a transition in the North East. It is still very early, but I believe there is reason to be optimistic.”
Agents unite to fill one North East hole
A regionally co-ordinated approach to inward investment and economic development ended last month when regional development agency One North East officially closed.
The debate about how inward investment enquiries should be dealt with following its demise has prompted multilateral action from nine of the region’s largest surveyors.
DTZ, GVA, Gavin Black & Partners, Jones Lang LaSalle, Knight Frank, Naylors, Sanderson Weatherall, Storeys Edward Symmons and JK Property Consultants have united under the banner ‘G9’.
“It sprung from the belief that a single voice would achieve much more than a series of individual observations,” says founding member of and principal at Gavin Black & Partners, Gavin Black. “We did not form in a King Canute style, but rather to enhance some of the positives of the region.”
Part of its role is to lobby for more public sector mediation, or at least less retrenchment in the region, while encouraging the property sector to take a more autonomous role.
“We need to have an effective link with inward investment enquiries,” he adds. “If there is a fragmented response and availability of information, then it will be to the detriment of the whole region.
He acknowledges that the region’s two local enterprise partnerships were created to give inward investment support and advice, but believes the climate of austerity demands more autonomous action from the private sector.
Black maintains that public funding has always been a critical factor in the North East, and cites the Metro Centre, Doxford Park and Cobalt as schemes that would not have happened without “tax-based funding”, or enterprise zone status.
“I understand the Treasury’s concern about transfer of existing jobs, but I don’t believe that has been the case in the North East,” he adds.
He does seem to have a point. The North East Development Co was responsible for bringing Nissan to Sunderland in the 1980s.
Filling the gap
“With the abolition of One NorthEast, all of these initiatives will fill the gap,” says Ian Ward, head of regeneration and property at Dickinson Dees:
? New Homes Bonus Scheme will raise £431m for Newcastle in 2012-13 through new council tax generated, match-funded by central government.
? The region’s two enterprise zones, covering 290 acres including land around the Nissan plant in Sunderland and the Swan Hunter yard in North Tyneside, allow low carbon businesses to tap into enhanced capital allowances. Over their lifetime, it is anticipated that nearly 5.5m sq ft of commercial space will be accommodated.
? Under the Local Government Finance Bill, local authorities will be able to retain a greater proportion of business rates from April 2013, creating collateral against which they can secure TIF loans for infrastructure development.
? The North Eastern LEP has secured £16.7m from the Growing Places Fund. Developers and businesses are being invited to bid for the cash, intended to fuel infrastructure, housing and economic development.
? NE LEP has also secured £45m from the Regional Growth Fund to support green technology growth.
? Newcastle city council has submitted a proposal to create an accelerated development zone funded from retained future business rates. The zone includes the 27-acre Science Central scheme, the 28-acre Stephenson Quarter and Central Station scheme, the 19.5-acre East Pilgrim Street development. The proposal is expected to secure £115m of infrastructure funding and deliver 3.2m sq ft of offices, retail, leisure and academic accommodation.
? Durham University is undertaking its £48m Gateway Project, involving a UK top-10 law school, library extension and a student support centre, due to be completed later this year. The investment represents 1.6% of County Durham’s annual economic output.
New crossing improves Vaux’s chances
When Sunderland city council bought the 26-acre Vaux brewery site from Tesco a year ago following 10 years of acrimony, few were under any illusion that steel would spring straight from the earth.
The council has long-term plans, first drafted by the now defunct regeneration company, Sunderland Arc, for 500,000 sq ft of offices, 1,000 homes as well as retail and leisure space.
The original masterplan, first drawn up in 2004 is being reviewed. Earlier this month, the council acknowledged to business leaders that it needed to start marketing the site as a joint venture opportunity, but failed to outline a timetable.
It has, however, agreed its budget, including city centre improvements that will support the Vaux vision.
The new crossing over the River Wear, scheduled to start later this year and be completed in 2015, will make Vaux more attractive to investors.
Durham City vision
Regeneration partnership, Durham City Vision, was subsumed into Durham county council earlier this month as part of the government’s restructuring of regional regeneration activity. The organisation’s work will continue, however, as part of the County Durham Economic Partnership.
“The withdrawal of RDA funding is a real loss to the North East. But that doesn’t mean that projects stop. We just have to find other ways, and private sector involvement is key to that,” says Sarah Robson, head of economic development at Durham county council. The council and HCA are now fully funding DCV.
Despite the upheaval, its flagship Freeman’s Reach project, a two-acre city centre derelict site on the east bank of the River Wear branded Durham Gate, moved forward this month. The council and HCA entered into a development agreement with Carillion Developments, Arlington Real Estate and Richardsons Capital that will see £27m invested in the site.
The former ice rink will be converted into 85,000 sq ft of grade A office space, with ancillary retail and leisure, anticipated to be delivered by August 2015. State-owned savings bank, NS&I, has prelet the first 42,000 sq ft phase, and will relocate from Millburngate House, also in the city centre.
Bill Lynn, director of Storeys Edward Symmons in Newcastle comments: “Though regeneration in the old-fashioned way is no longer happening, due to the lack of funding, Durham Gate represents a major private investment and one of the North East’s largest regeneration schemes.”
