Insights and Research

Urban Renewal: Quarterly Update Urban Renewal: Quarterly Update

Insights and Research

Urban Renewal – Key Concepts

Definition Urban Renewal is the revitalisation of

large, underutilised brownfield sites

typically owned by Government, through

large-scale, mixed-use redevelopment.

Stakeholders Government, as the landowner Government delivery authority Capital partners Master developer and plot developers Future occupants and visitors Community groups

Key Drivers Social changes: steady population growth

in capital city CBDs, increasing

concentration of employment in CBDs,

decline in number of persons per

household Changes in the urban environment:

limited land supply in CBDs, congestion &

lack of adequate public transport, availability of previously industrial sites

Regulatory changes: rezoning to shift

land to highest/best use, densification

policies and housing affordability policies

Major

Benefits

Increased employment during long

construction periods Increased tax revenue New housing supply Improved environmental outcomes

Key Risks Constant change in vision and masterplan

Underestimating project complexity

Balancing commercial and community

interests

Stakeholder governance and

communication breakdown

Checklist for Success

Clear project vision

Vision shared by land owner, developer and Government

Community informed and engaged

Recognition of project complexity and risk

Developer commensurately rewarded for risks

Place creation and civic infrastructure

Planning process transparent and predictable

Regular communication with stakeholders

Introduction

This Emerge Capital Quarterly Research series examines the

increasingly important urban renewal market in Australia.

This is the first of three issues that examine key aspects of an

Urban Renewal framework for developers.

Urban Renewal projects are large, complex real estate

developments. They involve the transformation of under-

utilised brownfield sites, typically located in inner city

locations and owned by government. Developments are

typically mixed-use and have a long gestation period from

acquisition to construction commencement.

The number of Urban Renewal projects coming to market in

Australia has accelerated drastically in the last decade and

shows no signs of slowing. With an estimated $71 billion of

projects coming to market in the next three years, Urban

Renewal will be one of the main drivers of pipeline for the

property industry.

Delivering successful Urban Renewal is a complex task and

needs to be planned through an appropriate framework that

considers a range of different elements, including:

1. the overarching Urban Renewal Strategy;

2. the methodology for Project Identification;

3. a project specific Bidding and Negotiation strategy;

4. Appropriate Capital Structuring; and

5. Effective Project Delivery.

In this issue, we will examine in detail the first two elements:

Urban Renewal Strategy and Project Identification.

Darling Harbour Live, Sydney

December 2014

Insights and Research Urban Renewal – Quarterly Update

Urban Renewal Strategy

The size, scale and complexity of Urban Renewal often mean

that projects have very long timeframes and involve a large

number of stakeholders with varying interests. As a result, a

well-defined, overarching strategy is necessary for developers

to:

define how best to capitalise on internal core

competencies;

drive internal commitment; and

focus regional plans towards wider Urban Renewal

objectives.

Urban Renewal projects are by

nature complex and risky. A

well-considered strategy is

crucial for developers wishing to

enter the sector.

Key considerations for an Urban Renewal Strategy to address

include:

What is the Opportunity?: The potential opportunities

and risks involved in entering Urban Renewal need to be

clearly defined to understand the potential reward of

entering this market.

Internal Capabilities: Potential entrants need to

understand their competitive strengths to know where to

focus their efforts and/or build capability.

Financial and Capital Requirements: Urban Renewal

projects are long-dated and require significant capital

commitments from the bidding phase through to

construction. Proponents have to consider their ability to

fund the project at all stages of delivery.

Target Projects: An understanding of internal

capabilities, along with the future pipeline and

competition will allow proponents to focus their activities

on the projects most likely to succeed.

Key Partners: Successful project delivery will require

effective partnership with both internal and external

stakeholders. The strategy needs to identify potential

partners who will commit to future operationalisation.

Organisational Structure: As most Urban Renewal

projects are mixed use projects where the sum of the parts

deliver something more than the whole, a traditional

“siloed” business unit structure may need to be reviewed.

Urban Renewal Strategy

Key Steps for Proponent:

Source: Emerge Capital Partners

Marina Bay, Singapore

What this means for

Developers: Urban Renewal Strategy is essential for

market entry to manage risk and prevent wasting of

resources.

Capital: Important to assess own strengths to secure

appropriate development partners.

Governments: Proponents with a well-articulated

Urban Renewal Strategy are more likely to be stronger

candidates in tenders, as they will have a better

understanding of their organisational strengths and

how they fit the project in question.

Plan to Operationalise

Define a future operating model to support business development and project delivery, with clear roles and accountability.

Align Organisational Goals

Engage with key internal stakeholders, potential external partners and subject matter experts to ensure alignment with the strategy and funding capability.

Set an Urban Renewal Vision

A concise urban renewal vision and set of objectives to guide future thinking, priorities and to define what the proponent stands for.

Insights and Research Urban Renewal – Quarterly Update

Project Identification

The next crucial phase for proponents is to identify projects

that align with their Urban Renewal Strategy. Since projects

vary tremendously in size, complexity and time scale,

developers need to be judicious about selecting projects that

best match their skills and funding capabilities.

Key questions that need to be addressed at this stage include:

Which projects are available?

How should we prioritise and filter the pipeline?

Who are our likely competitors on bids?

Urban Renewal project bids are costly, require dedicated

resources and significant outlay for the concept design. They

are also highly competitive as a result of a limited supply of

developable inner city land. For these reasons, it is

recommended that proponents develop a deal filter to identify

which opportunities present a high probability of winning and

align to the core competencies identified through the Urban

Renewal Strategy.

What this means for

Developers: Viewing urban renewal opportunities

through a deal filter ensures resources are concentrated

on the most relevant opportunities.

Capital: Deal filters are as important for investors as

they are for developers, and should take account of the

investor’s required returns, risk tolerance and

timeframe.

Governments: Understanding developers’ and

investors’ project selection criteria is useful for

running the bid process and setting development

conditions.

Investment Filter Criteria

Source: Emerge Capital Partners, 2014

Does the business unit possess

any competitive advantage

over our competitors?

Will costs associated with the

bid be reasonable and within

the bid budget?

Is there certainty in the

planning process and

outcomes? Have other risks

been considered?

Does the development plan

focus on growth for the

business unit?

Is the project located in a

geography that aligns with

business unit strategy?

Is there alignment between the

counterparty and the business

unit?

Does profit emerge in line

with medium term Business

Plan requirements?

Does the project address a

current portfolio rebalancing

requirement?

Are there other additional

benefits that can be derived?

Is the project of appropriate

scale and have all

infrastructural complexities

been considered?

Do we have the right resources

to commit to the project across

all stages of delivery?

Does the market display sound

fundamentals?

Growth Geography Market Fundamentals

Portfolio Mix Counterparty Timing

Scale & Complexity Auxiliary Benefits Planning Liability

& Overall Risk

Competitive Advantage Delivery Availability Reasonable Bid Costs

Insights and Research Urban Renewal – Quarterly Update

Australian Urban Renewal Pipeline – Dec 2014

(Projects with end value >$1bn)

.

Source: Emerge Capital Research

Please Note: While every effort has been made to ensure complete and accurate information in the diagram above, estimated date to market and project end values are

subject to change. The information provided in the above diagram is intended to provide general guidelines only

Insights and Research Urban Renewal – Quarterly Update Urban Renewal – Quarterly Update

Current Projects Update (Projects with end value >$1bn)

Project Location Developer Total

Value

Expected

Completion Update

Sydney Mirvac $8.0bn 2030

Nov 2014 – Complete sell-out of the first release of

apartments in the first building at Green Square Town

Centre: more than $150mn was exchanged over 2

days.

Sydney Lend Lease $6.0bn 2022

Nov 2014 – The Wynyard Walk – a bridge allowing

>20,000 pedestrians to reach Barangaroo from

Wynyard station, has begun construction.

Sydney Lend Lease $2.5bn 2019

Aug 2014 – Lend Lease signs a conditional agreement

to develop, build and sell a luxury hotel to Jerry

Schwartz, and to be operated as Sofitel by Accor.

May 2014 – Construction commences for the

convention, exhibition and entertainment venues.

Sydney Frasers $2.0bn 2016

Nov 2014 – Unilodge, a specialist student

accommodation provider, will offer 237 apartments at

Central Park. It is expected to open in Feb 2015.

Sydney Mirvac $1.1bn 2017

Jul 2014 – Locarno, the first precinct within Harold

Park is complete.

Brisbane Lend Lease $2.9bn 2026

Nov 2014 – Lend Lease has called for expressions of

interest in South Yard, the next residential stage at the

Showgrounds. This is four months ahead of schedule.

Melbourne Lend Lease $4.5bn 2021

Nov 2014 – Lend Lease has submitted plans to build a

$600mn complex of 1,070 apartments to mark the end

of development at Victoria Harbour.

Melbourne Quarter Melbourne Lend Lease $1.6bn 2024

Late 2014 to early 2015 – Staged construction

planned to begin

Melbourne

Beck

Property

Group &

Probuild

$1.5bn 2025 Nov 2014 – Preparation of the area for construction

scheduled to commence.

Adelaide

Renewal

SA (Invitation for

Offers)

$1.0bn 2025

Aug 2014 – Bowden’s largest land release since

renewal began in 2012 to be offered to developers.

Land will accommodate up to 3 or 4 apartment

buildings between 4 and 8 storeys.

Perth

Leighton

Properties

& Mirvac

$5.3bn 2020

Nov 2014 – Kings Square achieves key milestone of

reaching its highest point in construction.

Sep 2014 – Wellington streetscape upgrades from

Milligan Street to King Street commenced.

Perth Lend Lease $1.0bn 2021 2015 – Expected commencement of construction.

Perth MRA

(Invitation for

Offers)

$2.6bn 2017 Nov 2014 – Works progressing to construct inlet and

public realm at Barrack Street Jetty.

Source: Emerge Capital Research

Insights and Research Urban Renewal – Quarterly Update Urban Renewal – Quarterly Update

Global Spotlight: King’s Cross, London

Project Characteristics

Developer/Asset Manager Argent

Land Owner

King’s Cross Limited Partnership (Argent 50%, London & Continental Railways 36.5%, DHL Supply Chain 13.5%)

Principal Contractors BAM, Carillion, Kier

Site Area 27 ha

Project Value ₤3 billion (A$5.5 billion)

Office Space 3.4 million sq.ft

Retail Space 500,000 sq.ft

Residential Units 2,000 units

Hotel 91 rooms

Expected Completion 2020

Source: Urban Land Institute

King’s Cross is a major Urban Renewal project in central

London, located on the site of former rail yards and industrial

facilities. The site benefits from its connection to six London

Underground lines, two regional train stations and an

international train station, however it has entailed significant

challenges for the developer in terms of heritage, place

making and community consultation.

King’s Cross – Planned Redevelopment

Place Making

From the early stages of the project, the developer recognised

the importance of place making for the success of the project.

Prior to redevelopment, the area was fairly dilapidated, and

featured some of the lowest commercial rents in central

London. The developer and master planner have addressed

the place making challenge through a significant open space

provision, with around 32% of the site area dedicated to public

squares. Ground plane activation is also key to the place

making strategy, with separate ground floor units providing a

significant retail and dining component. Securing the

University of the Arts London as one of the first occupants

was also important in positioning the precinct as a vibrant,

creative and artistic area.

Vision and Flexibility

Before drafting a master plan, the developer outlined its vision

in Principles for a Human City. While they remained

committed to fulfilling this vision, it was recognised that the

master plan needed built in flexibility to deal with changing

market conditions in a project with a circa 20 year timeframe.

This need was recognised by the planning authorities, with

approval for the master plan given in terms of “total

permissible area”, which allowed for trading between land

uses to retain the ability to accommodate change if necessary.

Land Partnerships

Argent entered into an innovative ‘joint collective ownership

acquisition and development’ agreement with landowners,

where the land was to be valued following planning approval

and completion of the Eurostar station at St Pancras. At this

point Argent had the option to acquire the land or enter into a

50/50 partnership. This ensured that Argent was incentivised

to maximise the value of the scheme, and allowed the

landowners to continue occupying the land until the new rail

link made redevelopment attractive.

King’s Cross – Granary Square

Community Engagement

Community consultation was given high priority, with the

developer attending local community forums around 40 times.

Heritage was an important consideration for the site, and the

developer worked closely with local councils, the Greater

London Authority and English Heritage to ensure satisfactory

outcomes.

Early Successes

Occupancy of the precinct began in 2011 when the University

of the Arts London moved into the Granary Building, helping

to establish the redevelopment as a creative precinct. In

January 2013, Google announced that it would move its

London offices to Kings Cross, with the new headquarters

being built through a development fund through.

According to the developer, rents for both commercial space

and residential units in Kings Cross have outperformed

expectations.

Source: Urban Land Institute

Insights and Research Urban Renewal – Quarterly Update Urban Renewal – Quarterly Update

Emerge Capital Partners

Emerge Capital provide real estate and infrastructure advisory

services to corporate, government and institutional clients.

We help our clients develop and execute strategy at a

corporate, fund, portfolio and project level.

Our advisory approach is underpinned by technical financial

analysis to provide pragmatic implementable advice for our

clients.

How can we help?

We have developed significant expertise in the urban renewal

sector, providing advice to developers, government and

investors on high profile urban renewal projects.

We help developers by providing:

Strategy and support for complex bids;

Business unit strategy, capital models and corporate support; and

Project delivery assistance, including independent

reviews and financial analysis.

We help governments by providing:

Concept stage advisory including feasibility analysis, business case development and market sounding;

Complex bid management and advisory services; and

Development oversight, including independent project reviews, financial analysis and project renegotiations.

We help investors by providing:

Pipeline analysis and opportunity identification;

Consortium formation and complex bid management;

Investment oversight, including independent project

reviews, financial analysis and forecasting.

Contact

Tim Frogley Emerge Capital Tel +61 2 8277 9200

Managing Partner 3 Hickson Road www.emergecap.com

tim.frogley@emergecap.com Sydney 2000

+61 431 566 790

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