HS2 Derailed? What Is Putting HS2 At Risk And What It Could Mean For Property

Most of the transport industry, the media and Sir Terry Morgan himself expect Sir Terry to be asked to resign as chairman of the £56B HS2 high speed rail project.

The Financial Times, which broke the story on 1 December, said Cabinet ministers were urging his dismissal "as fears grow" that the project will overshoot its budget "by a big margin."

A wobble for HS2 from which the project will recover, or the first sign of the instability that could lead to a fatal fall?

Bisnow analyses what is at stake, and identifies the problems.

1. HS2 Could Become Undeliverable Or Unaffordable

The project's budget is fixed within a £55B to £57B cost envelope (at 2015 prices) but there are already signs that costs are rising. HS2 Chief Executive Mark Thurston has said he is in talks with contractors to reduce costs on a batch of contracts originally valued at £6.6B, Infrastructure Intelligence reports. Worrying language includes talk of costs not being "fully understood" and "cost-gaps" to be plugged.

Two risks arise. First, that contractor margins will be squeezed, causing them to drop out or for corners to be cut which may bring extra costs later.

Second, that the cost envelope gets breached. HS2 comes as ministers digest a rise in the cost of the Crossrail project in London, where the original £1B development cost has escalated to £15.8B and is still rising. It will also be a year late. A similar 1,400% increase in HS2 costs would not get through the Treasury.

2. Big Questions Are Still Not Resolved On Phase 1

The Phase 1 London to Birmingham line is the most advanced, with about £4B already spent. Yet speaking to the All Party Parliamentary Group on Rail Thurston made another disclosure which will worry the Treasury. "One of the biggest risks in major projects around the world has been proceeding with construction without being absolutely confident that the design can be delivered both in fulfilling the operational requirements of the railway and the budgetary constraints. We are not there yet in terms of detailed design and I will not rush into the construction phase. Any delay will be for the right reasons," Railway Gazette reports.

3. Even Bigger Questions Are Unresolved on Phases 2A And 2B

The Chancellor of the Exchequer and the Transport Secretary are said to be considering the extension of HS2 from Manchester to Liverpool to co-ordinate with the opening of the HS2 link in 2032, the Yorkshire Post reports.

However, two Cabinet ministers have suggested the £56B project should be cancelled entirely, whilst a third said the Birmingham to Leeds leg should be scrapped, the Sunday Telegraph reported. Behind their concerns are fears that costs will escalate to £100B.

Speaking at a rail industry event, Transport Secretary Chris Grayling said the Birmingham-Leeds line was "not in the bag." Sir Terry Morgan went further, saying that without the Northern Spur, the HS2 project was in serious peril.

“The truth is, that without the northern section of HS2 there isn’t a business case for the line at all. You wouldn’t do HS2 on the basis of phase one [London to Birmingham] on its own. HS2 definitely needs phase two, otherwise it does not work,” New Civil Engineer reported him saying.

The Department of Transport responded to reports of the conference by saying any threat to the HS2 line to Birmingham was "absolute nonsense" and that Grayling's and Morgan's comments were taken out of the context of appeals to local business leaders to campaign for the HS2 lines in the way that London business campaigned for Crossrail.

The timetable for Phase 2 also seems to be sliding, with potential for the scheme to complete as far out as 2036, three years later than planned.

4. Would The End of HS2 Mean Big Damage For Birmingham And Manchester Real Estate?

For Birmingham, the collapase of HS2 would be a serious disappointment although, as Bisnow has reported, one that would not surprise some property developers and one from which they believe the city would soon recover. 

Speaking at the Bisnow event in September, Court Collaboration founder Anthony McCourt said: “Let’s be clear, the HS2 scheme is in jeopardy, and I would not assume it can’t be canned just because they’ve passed an Act of Parliament." But he insisted that the city would survive the shock.

City centre land pricing and office rents might take a temporary knock: Bisnow reported in January that hope value was nudging prices up, although agents and developers warned that the impact should not be exaggerated.

If there is an impact it would be felt more sharply at the Arden Cross site, near the Solihull HS2 interchange. The site will see 2.6M SF of commercial floorspace and around 2,000 homes but with both commercial and residential land in the area at a premium, the scheme has plenty of appeal with or without HS2.

In Manchester enthusiasm about HS2 never reached boiling point, and 2033 (or 2036) is a long way away. As a result, seen from 2018, the impact will be limited to the city's Piccadilly district surrounding the proposed new HS2 terminal, where up to 8M SF of new development is envisaged. But here, too, a shortage of city centre sites means the area would bounce back rapidly.