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Agenda item

Heart of the City 2 Update

Presentation from the Director of City Centre Development



The Committee received a presentation from Nalin Seneviratne (Director of City Centre Development), providing an update on Heart of the City 2.  Mr Seneviratne reported on the progress with regard to the development of each block of the scheme, the heritage position with regard to Block H, together with an update on the leasing and marketing arrangements.  He concluded by referring to the current financial position, highlighting the approvals and expenditure with regard to each of the blocks.




Members of the Committee raised questions, and the following responses were provided:-




·             There had been recent changes in terms of retail rents across the UK, with the rents now being based on the overall square footage of the premises, rather than the traditional shop front rental method (Zone A).  Zone A retail rents in Sheffield had reduced over the last few years, from an average of £270 to £165 per square foot.  Several retailers were now wanting to enter into total turnover cost deals in connection with their rent, which the Authority was seeing more of, with resultant risk being shared between landlord and tenant.  The Authority was now also undertaking more detailed assessments of prospective retailers wanting turnover rents, including investigations into their business operations and online operations, and would only offer deals to those companies whose business models were considered to be sufficiently robust.




·             The Authority held a risk register in connection with the scheme, which was regularly monitored and updated.  The current risk to the retail sector, nationally, had been well documented, and by using the risk register, the Authority was constantly monitoring the market.  The key mitigation measure was that the development was being progressed on a block by block basis and, if any risk was identified, and that could not be mitigated or accepted, in terms of any of the blocks, development could be stopped. 




·             Whilst it was acknowledged that shop units were being left vacant in parts of the City Centre following the relocation of some retailers, some of these retailers were simply relocating elsewhere in the City Centre, and not leaving the City.  It was accepted that there were current challenges with Fargate, which were due partly to the constraints in terms of access to, and the nature of, the buildings.  Fargate was currently going through a period of transformation, and it was hoped that future development plans would be aided by a successful bid from the Future High Street Fund.  There were also plans for investment in Orchard Square, which would help to enhance the overall City Centre development plans.  There had never been any plan, as part of Heart of the City 2, to take any retailers off Fargate.  Current footfall levels at Meadowhall showed that there was still life in the retail sector, and highlighted the fact that location and offer were key elements. 




·             Whilst it was accepted that there was also an element of risk in terms of demand, in the office sector, the Authority was confident that the proposed office accommodation being let as part of the scheme would be successful.  Block C on Pinstone Street was being developed on a speculative basis. However, companies were already making enquiries to take up that office space.  The Authority was finding that companies were looking to provide better office accommodation for their staff, both in terms of improving staff wellbeing and accommodating modern methods of working, and that several companies had expressed a wish to either locate, or relocate, to the City Centre.




·             Whilst not being able to comment in any detail on the current position with regard to the Local Plan, Mr Seneviratne had been consulted on the City Centre element of the Local Plan, as well as on the City Centre Vision.  It was not envisaged that the recently announced delay regarding the Local Plan would have any adverse effects on Heart of the City 2. 




·             Whilst it was acknowledged that the total committed cost of the scheme - £469 million, represented both a vast sum and a  potential development risk, it was stressed that this sum did not represent normal capital programme expenditure but instead, involved the development of investment assets, with the creation of income-generating buildings.  In terms of Block D, for example, HSBC were paying the Council rent, and the option was always there for the Authority to sell the building and obtain a capital receipt.  As the scheme was being developed on a phased block by block basis, construction of the blocks, save for Block C, would only commence when the Authority had received assurances in terms of pre-lets, and any risks were reviewed on a block by block basis.  As part of the risk review process, the financial standing of occupiers was being scrutinised.  The issue of risk was taken very seriously, and taken fully into account, and the market was being constantly assessed so as to mitigate any such risk to the Authority.




·             It was believed that the accommodation to be provided at West Bar was a different offer to that at Heart of the City 2, with differences on space, rental values and location being factors of choice. 




·             It was not the intention, as part of the scheme, to move any retailers out of their existing premises in the City Centre, but more about creating opportunities for those retailers to move to more fit for purpose accommodation.  There had been an increase in expressions of interest from companies and retailers from other areas of the country, including London, partly due to the lower rents in Sheffield.  Some companies or retailers were looking to relocate due to expansion or because their leases were coming to an end.  Officers were currently supporting a company to look at how the former HSBC office accommodation at Silver Street Head could be repurposed.  There was still a demand for smaller office accommodation, which had previously comprised, in some cases, converted residential accommodation, from which expanding companies were now looking for new opportunities with the options for the old office space converting back to residential accommodation. 




·             The marketing in respect of the hotels as part of the scheme had been targeted towards the lifestyle/boutique/4-star plus chains, and a number of big hotel chains had expressed an interest.  It was proposed that the hotel in Block G was more a budget style.  The intention was to retain the freehold of the whole site, thereby retaining an element of control through the leases. 




·             The Authority had worked very closely with Arup, an engineering consultancy, in connection with the environmental credentials of the scheme.  There was also a general sentiment shared by a number of businesses and their staff in terms of being environmentally-friendly.  One example of this was that, as part of the development, HSBC were connected to the district heating scheme, with other occupiers of the development expressing an interest to do the same.




·             There was the belief that once one or two prestigious retailers opened premises in the City it would give confidence to others to do the same.  Interest had been received from other major retailers in respect of the other retail units in Block D, on Cambridge Street and Wellington Street.




·             The Authority was currently in dialogue with the owners of the buildings south of Charles Street, on Pinstone Street and Union Street, and it was hoped that new development plans for this area would be submitted in the near future. 




·             The development of 3 St Paul’s Place, which had been constructed as part of the original Heart of the City Project, had been the major factor in terms of driving up office occupation in this central part of the City Centre.  As with the first phase of the Project, it was important that the Authority continued to have confidence in the future development of the City Centre, whilst also being mindful in terms of managing the risk. 




·             It was very difficult to predict if there would be any likely adverse effects on the development following Brexit and the upcoming General Election.  Both these factors were on the risk register and, by progressing the development on a block by block basis, this gave the Authority the opportunity to halt the development of any Blocks if necessary. 




RESOLVED: That the Committee:-




(a)      notes the information reported as part of the presentation, and the responses to the questions raised;




(b)      thanks Nalin Seneviratne for attending the meeting and responding to the questions raised; and




(c)      welcomes the progress being made in connection with Heart of the City 2.