St James Quarter, located at the east end of Princes Street, is to be transformed as part of a £850m development.

The funding is a funding agreement between Edinburgh Council, the Scottish Government and TIAA Henderson Real Estate (TH Real Estate).

A total of £61m is required to improve local infrastructure and public space in the area for the regeneration scheme, and this will be facilitated by the local authority through a new funding model. Referred to as the 'Regeneration Accelerator Model' (RAM), the initiative will allow for a combination of public and private sector investment in local infrastructure and public space that can then be offset by business rates and overall gains to the economy.

Proposals for the ambitious development include a high-quality retail space, grade A office space, a five-star hotel, a four-star hotel, an apart-hotel, digital theatre, restaurants and residential units. New retail, hospitality and construction skills academies will also help provide extra support for those seeking employment such as school leavers, the Council has said in a statement.

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The development will also have excellent transport links, and is situated next to Edinburgh Waverley railway station, Edinburgh Bus Station and the St Andrew Square and York Place tram stops. Plans for this phase of the project include a new combined cooling, heat and power centre, electric car charging points, extensive facilities for cyclists, photovoltaic panels, solar tubes and a city car club.

It is estimated that, between 2015 and 2040, the redevelopment of the St James Quarter will also support 2,300 permanent jobs and contribute £25m to the Scottish economy each year.

Deputy First Minister, Nicola Sturgeon said: "Today's announcement will transform this area of the capital, creating thousands of jobs and boosting the Scottish economy.

"This has only been possible due to an innovative funding model, which will see the Scottish Government work in partnership with City of Edinburgh Council and private developers TIAA Henderson Real Estate.

"This government is determined to invest in Scotland's infrastructure – both to stimulate growth in the short term and lay the foundations for long term success. Through schemes such as RAM we are increasing public investment in infrastructure across Scotland, which will create overall gains for the economy as a whole."

Martin Perry, Director of Development, TH Real Estate, added: "Our aspirations for the St James Quarter have been well known for some time now and to have secured this funding support is a key milestone for this exciting project, demonstrating confidence in Edinburgh as a leading European city.

"This scale of investment is unprecedented in central Edinburgh and will transform the city's retail offer, putting it on the international 'map' of major shopping destinations. We are now looking forward to delivering other key milestones in order for construction to start."

The existing St James Centre will continue to trade until construction work begins in 2015.

(JP)