New Anglia LEP Investment Appraisal Committee
Wednesday 23rd May 2018
9am to 9:45am
Co-op Education Centre, 11 Fore St, Ipswich IP4 1JW
Agenda
Committee Members
Lindsey Rix
Aviva
Cllr David Ellesmere
Ipswich Borough Council
John Griffiths
St Edmundsbury Borough Council
Sandy Ruddock
Scarlett and Mustard
Alan Waters
Norfolk County Council
Tim Whitley
BT
Dominic Keen
High Growth Robotics
Exec Members
Iain Dunnett
New Anglia LEP
Chris Dashper
New Anglia LEP
Tracie Ashford
New Anglia LEP
No.
Item
1.
Welcome
2.
Apologies
3.
Declarations of Interest
4.
Minutes from last Meeting
5.
Horizon Paper - Confidential
Items for discussion
6.
Capital Growth Programme - Confidential
7.
Speculative Development Paper
8.
Atex Developments - Confidential
Other
9.
Any Other Business
Date and time of next meeting: Wednesday 20th June, 2018. 9am-9:45am
Venue: The Council House, University of East Anglia, Norwich, Norfolk, NR4 7TJ
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New Anglia Investment Appraisal Committee
Meeting Minutes (Unconfirmed)
18TH April 2018
Present:
Committee Members
Lindsey Rix (LR)
Aviva
Cllr David Ellesmere (DE)
Ipswich Borough Council
Tim Whitley
BT
Dominic Keen (DK)
High Growth Robotics
In Attendance
Iain Dunnett (ID)
New Anglia LEP
Keith Spanton (KS)
New Anglia LEP
Chris Dashper (CD)
New Anglia LEP
Tracie Ashford (TA)
New Anglia LEP
Actions from meeting 18.04.18
Horizon Projects Table
New headings detailing funding, drawdown, forecast and a RAG rating to be included and
ID
for the table to be transferred to excel.
Speculative Investment Paper
CD to make the amendments as discussed and re circulate to the Investment Appraisal
CD
Committee before the next meeting.
1
Welcome from the Chair
Lindsey Rix (LR) welcomed everyone to the meeting.
2
Apologies
Apologies were received from Sandy Ruddock, Alan Waters and John Griffiths.
3
Declarations of Interest
Full declarations of interest can be found at http://www.newanglia.co.uk/about-us/the-board/.
Declarations relevant to this meeting: NONE
4
Minutes of the last meeting
The committee agreed the minutes were a true account from the last meeting on 21.03.18.
Actions from last meeting updated as follows:
Capital Growth Programme Verbal Update
CD/ID to review Cultural Projects - to be completed as part of the Growth Deal appraisal of
deferred projects - Ongoing.
CD to oversee review of Growth Deal projects in May - Ongoing.
Minutes from last meeting
All attendees to be listed on the agenda - Completed.
Minutes from last meeting
Horizon information to be visible at the beginning of the meeting papers in future -
Completed.
Stowmarket Atex Confidential
ID to send the committee further information on land value, draw down and cash flow for
committee consideration and recommendation to board - Completed.
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Horizon Projects Table - Confidential
Iain Dunnett (ID) took the majority of the paper as read and reviewed the key points of the
paper.
Lindsey Rix (LR) stated this was a good start to the development of the table.
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Tim Whitley (TW) noted the absence of some data and ID explained this was only for the
current financial year.
LR would like the table to be converted into Excel with running totals and further headings of
Approved Funding, Current drawdown, drawdown forecast with these spread across the
years to 2021, RAG status to be included.
The Committee agreed
To note the content of the paper.
That new headings detailing funding, drawdown, forecast and a RAG rating to be
ID
included and for the table to be transferred to Excel for the next meeting.
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Speculative Investment Paper
Chris Dashper (CD) took the majority of the paper as read and highlighted the key areas.
TW asked what sum of money this would relate to and CD explained £500,000 - £1,000,000
and that all the other factors would need to be considered.
TW said that previous awards of funding had enabled removal of a barrier for example some
additional infrastructure or enabling and he would like to see that captured in the paper.
LR agreed and also mentioned the link to the Economic Strategy and that the explicit
rationale would need to be detailed.
David Ellesmere (DE) explained the paper highlighted we were treating residential and
commercial applications the same and there should be a different criteria, DE also
highlighted the need for the match funding to be clear as would build confidence in lending.
LR said a set of return on investment guidelines were required.
LR was concerned about the capacity within the team for these types of projects with limited
resources available.
DE questioned how much it costs for the LEP to set up a speculative loan and noted that
loans would have to be priced accordingly.
LR asked for CD to amend the paper in line with the discussions and re-circulate before the
next meeting of the IAC.
The committee agreed
To note the content of the paper.
For CD to make the amendments as discussed and re circulate to the Investment
CD
Appraisal Committee before the next meeting.
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West Suffolk College Engineering and Technology Centre
CD took the majority of the paper as read and reviewed the keys points of the paper
LR asked if anything had dramatically changed from the original paper and CD said there
could be some over-run costs which the LEP would not be covering- these costs were
unknown until full access to the building had been secured.
Dominic Keen (DK) asked when they would start educating students CD confirmed next
academic year.
DE asked if the LEP had ever considered owning the building and CD said that they had not
at the time but that was a potential for other non-grant aided projects.
The committee agreed
To note the content of the paper
For CD to present the committee recommendation at the LEP board meeting on the
CD
23rd May 2018 for the release of the remaining £3m to West Suffolk College
Engineering and Technology Centre
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Draft Capital Growth Programme Call - Confidential Appendices
CD took the majority of the paper as read and highlighted this was an introductory paper
and reviewed the key points.
TW asked what proportion of the remaining funding was left to allocate, CD explained it
would use up the majority of the £9m 2017 call fund and some projects may qualify for a
Growing Places Fund grant, CD also explained there would still be an Autumn call for the
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remainder of the Growth Deal funding and all projects not funded now could be considered
again as part of that round.
The Committee Agreed
To note the content of the paper.
That the paper would come back to the Committee in May for approval and
recommendation to the May LEP board meeting
Other
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Any Other Business
Cash Deposits - Confidential Paper circulated at meeting
Keith Spanton provided an update on the receipt from government of the Growth Deal funds
for 18/19 and where the funding would be deposited until drawn down by the approved
projects
The Committee Agreed
To note the content of the paper
That the funds be deposited as recommended in the paper
Next Meeting
Wednesday 23rd May 2018, 9am - 9.45am.
Co-op Education Centre, 11 Fore St, Ipswich IP4 1JW
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New Anglia Local Enterprise Partnership
Investment Appraisal Committee
Wednesday 23rd May 2018
Agenda Item 7
New Anglia LEP: Speculative Investment
Author and presenter: Chris Dashper
Summary
Since 2012, when the Growing Places Fund was first launched, New Anglia LEP has had the
opportunity to support commercial projects with repayable loans.
Due to the requirement to ensure that best value is secured through the use of public funds at
minimal risk, the majority of loans made by New Anglia LEP to date have been non-speculative,
with either a confirmed end user or occupant or a defined and manageable repayment method
in place from the outset.
New Anglia LEP continues to receive regular requests for funding through the Growing Places
Fund, many of which could be considered as speculative projects.
In lower risk circumstances, a loan for a speculative project may be appropriate for LEP
support. This paper proposes a framework through which the LEP can determine whether it
should or should not invest in speculative developments.
The paper also includes a table to calculate the appropriateness of investments in terms of the
return received.
Recommendation
The Board is recommended to consider using Growing Places Fund and other funds if available
to support speculative investments in certain lower risk circumstances.
Background
The term ‘speculative construction’ or ‘speculative development’ describes a process in which
unused land is purchased or a building project is undertaken with no formal commitment from
any end users.
Despite the end user being unknown, the developer is confident not only that they will be able
to find one but also that the type of development being undertaken is suitable. This contrasts
with custom building when a builder is contracted for a specific development by a client who is
able to provide a brief of their requirements.
Speculative development does have a degree of notoriety attached to it, from the 1980s in
particular where in cities and major growth areas de-regulation of the financial sector and the
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availability of international financing led to significant commercial developments and property
booms.
Examples of speculative construction include:
Constructing retail space to lease space from or to sell
Constructing a business park or office space to sell or lease
Building houses to sell
Conversion of existing buildings into other uses to lease or sell
Speculative developers typically profit from carefully timing the buying and selling of land or
property for development.
Land for office or housing developments can often be purchased at a cheaper rate during a
market depression and then sold once developed when the market has recovered. However
there is risk in this as the costs are often high, the timescales are long and the consequences of
misjudging the market and not finding a buyer can be serious.
Public funding is not traditionally used to support the purchase of land and the LEP would not
consider requests to solely support the purchase of land through any of the programmes. The
growing issue of land banking is also a reason not to support land purchases.
For any other type of development the LEP already operates a policy of supporting ‘shovel
ready’ projects to ensure that funding is not tied into projects that have no chance of an
immediate start.
It can be common for speculative developments to remain empty or partially empty for a long
time after construction and for developers to suffer financially as a result, which can then have
a corresponding impact on the ability to repay any debt finance.
It is rare that large scale speculative developments such as large offices will be undertaken by
anyone other than the largest developers as the amount of investment and duration can be
prohibitive.
Building companies speculating on small scale industrial developments are more common and
of the type that New Anglia LEP has often been approached to support, for example the
Malthouse in Ipswich and Atex in Stowmarket.
It is also common with owner-occupied housing, where there is a relatively short build time,
limited capital is tied up in the building and there may be greater willingness from commercial
banks to extend credit on the security of land holdings. The LEP has had few approaches for
such investments because there is a less obvious failure in the traditional funding available in
the market.
New Anglia LEP has funded a number of commercial and public projects through repayable
loans since the launch of the Growing Places Fund in 2012.
Table of LEP loans to date
Project
Loan £
Public/Commercial
Loan type
Haverhill Research Park
£2m
Commercial
Road infrastructure
Barton Mills Roundabout
£500k
Commercial
Road infrastructure
Kesgrave Hall
£300k
Commercial
Commercial business
Kings Lynn Innovation
£2.5m
Public
Innovation Centre
Centre
Pasta Foods
£2.4m
Commercial
Commercial business
Peel Estates, North
£2.3m
Commercial
Housing infrastructure
Walsham
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Ipswich Flood Defence
£6.6m
Public
Flood defence infrastructure
Scheme
Ipswich Winerack
£5m
Commercial
Housing infrastructure
Malthouse Ipswich
£600k
Commercial
Commercial business space
Loans have been awarded for a variety of purposes, from unlocking stalled sites with
infrastructure, which was the original purpose of the Growing Places Fund, through to the
purchase of capital equipment and capital build and flood defences.
To ensure appropriate use of public funding, all loans to date aside from Ipswich Malthouse
have been awarded on a non-speculative basis, with either an existing owner or an identified
future occupier or a pre-arranged repayment arrangement in place.
Where housing projects have been supported through the Growing Places Fund, the loan has
been provided for the infrastructure to unlock the site, not to fund the houses themselves.
The exception to this is the Ipswich Winerack, where the fund has supported a mixture of
infrastructure and housing, but only because the Homes and Communities Agency was the
senior partner in the project, which reduces the overall risk for the LEP. The deal also included
a significant number of pre-sales of flats.
Ipswich Malthouse, which has received agreement for a GPF loan is considered to be a
speculative project, because the project had no confirmed future occupiers at the time of
approval, however, the project was considered to address a market failure in Ipswich, with a
significant level of un-serviced demand for small, easy terms business lets, particularly in a
prime location between the railway station and the Princes Street EZ in Ipswich
Key considerations
Evidence of demand
Recent discussions around commercial developments such as the Malthouse in Ipswich and
ATEX in Stowmarket suggest that demand for speculative type investment exists and that a
market failure remains concerning the ability to secure all necessary funding to commence such
developments.
Our Economic Strategy development work has highlighted a shortage of quality office and
commercial accommodation in our area.
Furthermore there remains a lack of appetite amongst commercial lenders to provide finance to
these schemes. There are a number of factors for this.
Commercial lenders have focused lending on larger projects, in London and the South East and
in centres such as Cambridge.
This means that SME developers in Norfolk and Suffolk are finding it harder to secure finance.
Our experience has shown that LEP support is an enabling factor in securing commercial
finance.
Consequently, on an appropriate scale and where other factors are met and a strategic benefit
exists, a degree of limited speculative commercial investment should be considered by the
LEP.
Residential vs Commercial investment
The criteria in this document applies to speculative commercial investments only, unlocking
residential developments should be considered a different scale of risk and a more common
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use of LEP funds, with several residential developments already supported by the LEP in the
past.
Skills and capabilities
It is appreciated that appraising speculative developments will require additional skills and
capabilities given the increased risks attached.
The LEP’s newly appointed Chief Operating Officer Rosanne Wjinberg is leading a review of
LEP programme delivery.
This will look at performance of our programmes, reporting mechanisms and will also ensure
additional skills and capabilities are added to the existing team. This could be through
accessing additional skills on a retainer or as and when basis.
This will include the skills required to analyse and recommend to the LEP Appraisal Committee
and LEP Board Investment more complex investments including speculative developments.
Financial impact
A higher proportion of speculative loans completed would have an impact on the overall funding
available to the LEP for more traditional interventions. However, speculative loans are likely to
be an exceptional request, rather than the standard.
In addition, delivery of our economic strategy ambitions through our programmes is the priority.
Speculative investments will be used to supplement programmes only to the extent that they do
not prevent them from delivering the promised targets
Assessment of applications
The following list defines the factors recommended to be reviewed each time a speculative
investment is being considered:
Projects should follow the original principles of the Growing Places Fund, with a focus
on unlocking stalled sites and addressing market failures
A suitable site should have been identified and any ownership issues resolved
Necessary approvals such as planning permission should be in place
Projects should be of appropriate size and complexity to be considered
Residual valuation exceeding loan request by appropriate ratio, to be determined by the
IAC
Amount of request should be within LEP preferential limits- the range of investment
would be between £300k and £1m.
Match funding or financing arrangements in place, LEP investment should not be the
only source of funding
Delivery and repayment within a 3-5 year time period
The market conditions and evidence of need at the time and in the future
The potential return on investment is commensurate with risk and value
Comparison with other potential projects to ensure best value
LEP delivery costs should be recovered from the applicant and the overall benefit to the
LEP as a result of investing should at least match the rate of inflation
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Acceptable Return on Investment scoring table
The table below can be used to score applications to provide an initial acceptability assessment
of applications for speculative developments.
Acceptable Return on Investment framework
scoring values in brackets
Public
or
LTV % (b)
Period of loan
Interest Rate % (d)
Commercial
(years) (c)
applicant (a)
Less than or
1 Year (1)
2%-3% (8)
equal to 10 (1)
Greater than 10
2 Years (2)
3%-4% (7)
or less than 20
(2)
Greater than 20
3 Years (3)
4%-5% (6)
or less than 30
Public: (5)
(3)
Greater than 30
4 Years (4)
5%-6% (5)
Commercial:
or less than 40
(10)
(4)
Greater than 40
5 Years (5)
6%-7% (4)
or less than 50
(5)
Greater than 50
6 Years (6)
7%-8% (3)
or less than 60
(6)
8%-9% (2)
9%-10% (1)
Scoring (a+b+c+d)
Acceptable scoring range 15-24
Should the above factors be satisfied and the project is considered to be of appropriate type
and scale for LEP investment (or the investment requested from the LEP can be scaled in a
way that still allows the project to proceed) then a legally binding, secured loan should be
considered by the IAC and subsequently by the LEP Board .
Link to the Economic Strategy
Support to developments of all types through LEP programmes links to the creation of jobs,
new homes, support to new and existing businesses and the promotion of growth locations and
Enterprise Zones.
The Economic Strategy seeks to influence the creation of high quality commercial space and
housing in the right places, along with appropriate infrastructure to support the growth of
communities and the places for them to live. Not all such developments are supportable by the
traditional finance marketplace, giving the LEP the opportunity to consider investing in certain
speculative opportunities.
Recommendation
The Board is recommended to consider using Growing Places Fund and other funds if available
to support speculative investments in certain lower risk circumstances.
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