Why social value is the key to unlocking urban transformation

In the aftermath of the COVID-19 pandemic, many of our towns and cities face unprecedented challenges of inequality and urban decline. The good news is that we are also seeing a sea-change in the attitude of the private sector in helping to tackle these problems, embracing the role it can play in driving transformational urban regeneration.

The pandemic has accentuated the difficulties faced by many urban neighbourhoods. Online shopping, increased flexible working, shortages of affordable housing, rising crime and the ravages of inflation are all taking their toll. Inequality has increased, as many segments of society hardest hit by COVID-19 restrictions are those most affected by a weakening economy.

For communities that were struggling before, the challenges have become greater. The real estate sector is typically quick to respond to redevelopment opportunities where the commercial and financial case for investment is straightforward, but this is rarely the case where problems are more entrenched.

What’s changing is that alongside the long overdue focus on tackling climate change, the private sector is now meaningfully embracing the wider environmental, social and governance (ESG) agenda. The increasing prominence of social value considerations in corporate thinking is changing the viability equation for urban regeneration projects.

Rather than just focusing on the “output” of a completed building, they are interested in driving the social value “outcomes” a successful project can help deliver. This comes at an opportune time given increasing pressure on local government finances, with capital projects at risk from rising finance and construction costs.

Nuveen Real Estate recently announced the establishment of a global impact investing programme aiming for $15 billion in real estate assets under management (AUM) by 2026. In the UK, Schroders Capital recently launched a place-based impact investment strategy with the specific objective of addressing social deprivation and inequality as well as delivering a financial return, with investments targeted at affordable homes, workplaces and mixed-use town centre re-purposing projects.

Similarly, financial services group Legal & General will invest £4 billion into urban regeneration and housing development in the UK’s West Midlands region by 2031. These announcements form part of a widespread trend in the global growth of impact investing, a market that has grown by over 60% since 2020 alone to be worth $1.2 trillion in AUM by 2022.

Private sector interest in place-based public-private partnerships or “PPP” is being driven by their ability to unlock large scale development and investment projects that are simply not possible without public authority involvement. The perception can be that such partnerships are simply about persuading the private sector to pay for public works, but this overlooks what government involvement brings to the table.

The public sector often contributes land or other assets to the partnership and can sometimes borrow at advantageous rates to increase the funding available. As well as contributing to the financing, public involvement helps de-risk projects and can stimulate additional private sector investment from sources beyond the principal development partner.

Accounting for the social as well as the financial benefits of a project can help bridge the divide between public and private sectors. But even with increased willingness to collaborate on both sides, three key challenges remain.

An ever-changing political landscape and periodic elections bring the risk that government support may wane over the course of the project. Public authorities worry that the failure of their business partner may leave them losing assets invested with no material benefit for the community. Long-term vision, leadership and commitment to delivering the desired outcomes are needed on both sides – but this is difficult to enshrine in a legally binding contract.

Even if wider social benefits are part of the overall “accounting” of the project, private companies still need a commercial return for the partnership to be viable. Identifying and documenting the respective risks and returns to be borne, including what happens if the results are not what’s expected and how disputes will be resolved, are often major sticking points.

To use an infrastructure example, a partnership to implement a new road scheme may ensure the private sector’s construction costs are covered but link the profit element of the contract to the reduction in road traffic accidents or fatalities. Thus, the profit-motive of the contractor is aligned with the desired social outcome of the local authority.

However, this is much harder to achieve in the case of a longer-term project where the aim is to improve health and living standards, employment opportunities and social integration within the wider community. Developing ways to effectively monitor and reward these fundamental objectives of urban transformation projects – and incorporating these metrics into partnership agreements – is key to unlocking the potential for wider private investment in such projects.

Solutions to these challenges do exist, but there are no easy “one size fits all” answers. Every regeneration project is different, so it’s impossible to be prescriptive about what any given agreement should look like. The positive news is that an expanding range of alternative partnership structures is helping channel a strong flow of investment capital into urban regeneration projects that are providing new blueprints for future success.

Avison Young is proud to be working with the World Economic Forum to build a taskforce to address these issues. In particular, we are looking to identify how local governments can best position themselves and their regeneration projects for success in partnering with the private sector. The Forum is perfectly placed to bring together the various stakeholders that are needed. We warmly invite you to join us in this critical project to help deliver the social value outcomes that are key to tackling the challenges faced by our towns, cities and communities.