Chief executive of council-owned developer exploring options in case crisis-hit Croydon decides to sell up
The chief executive of Croydon’s council-owned housing development company Brick By Brick has said he is in talks with potential buyers for the business in case the beleaguered local authority decides to sell it.
The housing company, set up by the council in 2016 and known as something of an architectural patron, has been hit by the fallout from the financial problems engulfing it, which culminated last week in the announcement by government of a rapid review into its governance and culture.
A “public interest” report into the council by auditor Grant Thornton late last month sharply criticised Croydon’s management of Brick By Brick, which is projected to borrow up to £249m from the south London local authority to fund its development programme, saying it had failed to pay back loans when initially expected.
Grant Thornton recommended the council, the sole shareholder in the developer, reconsider lending any further money to Brick by Brick, and called for it to “review and reconsider” its equity investment in the firm.
In an exclusive interview with Building Design’s sister title, Housing Today, Colm Lacey said the report’s findings left him with no choice but to explore the potential for a future outside of council ownership and not reliant on council debt funding.
He said initial soundings had shown there “is interest in the market” from the private sector in buying the firm, which has so far built 283 homes.
While Lacey said he couldn’t give any detail around specific discussions that are taking place, Housing Today understands there have been at least two expressions of interest from the private sector in acquiring the developer.
Lacey denied Brick By Brick had missed debt repayment deadlines – claiming that all changes had been agreed by the council which approved its annual business plans – and said he was also exploring private sector debt funding for the firm.
According to its latest business plan, Brick By Brick is expecting to receive £108m in debt funding from the council to deliver its development programme next year – but this is now in doubt.
Lacey said: “We are exploring options with funders – as a responsible chief executive I have to explore what happens if Croydon decides it doesn’t want to fund us, or if it wants to change ownership.
“There is interest in the market, people are making interested noises. My role is to ensure we can continue to operate if we have different funding in future.
“I think we’d appeal to lots of potential buyers – private equity, housebuilders, housing associations.”
He said conversations were at a “really early stage” and that for the moment the firm remained wholly owned by the council.
Brick By Brick has built 283 homes on 15 initial sites and says it brought in revenue of £23m in 2019/20, though audited accounts have not yet been published.
It has a further 700 homes in active development and is also midway through bringing forward a second wave of schemes, with planning applications for 32 separate sites under consideration equating to between 600 and 700 further homes.
Schemes it is working on include a 25-storey mixed-use tower designed by Pitman Tozer that will be built on a former car park in the middle of the town.
If council funding is halted without Brick By Brick having alternative funding in place, this would put the delivery of its pipeline of schemes at risk, jeopardising promised returns to Croydon.
Lacey admitted that current projections showed the firm repaying its debt to Croydon later than originally envisaged but said that this had been explicitly agreed to by the council. “There have been delays to projects but I’d expect delays to projects as we deliver very complex small sites, and we’re delivering 30 at once, which takes a huge amount of resource.”
Lacey said the firm’s draft accounts, currently awaiting sign-off, show the firm has earned enough to make its first repayments to the council this year, of £14m, and has provided a further £6m boost to council land value, as well as turning its first profit, of £250,000, pre tax.
But he said the crisis at the council was making it hard to deliver its current programme, because of the need for council decisions over planning applications, other build permits, funding and land. He said delays in council decisions this year had already reduced Brick By Brick’s ability to deliver on its busines plan targets this year by up to 40%.
The developer’s 2020/21 business plan had predicted it would make a profit of £7.5m and pay £60m of debt back to the council.
“It’s [council delays] having a really huge impact on delivery already. But if it doesn’t get sorted quickly then it will have a much more significant impact,” he said. “We haven’t paid debt back up to now because we haven’t been supposed to. But we’ve shown how the money will be paid back and we see ourselves as potentially part of the solution [to the council’s funding problems].”
While he said he welcomed the commitment by the council and government to rapidly addressing the crisis, he warned: “We really need answers now, as we need to make strategic decisions about what will happen over the next 2-3 years.”
The council has scheduled a meeting for 30 November at which it expects to approve an initial action plan to find a way forward following the Grant Thornton report. This is expected to include findings from a review of Croydon’s suite of wholly-owned companies, including Brick By Brick, specifically commissioned from auditor PwC.
The separate rapid review of the council commissioned last week by the government is also set to report at the end of the month.
The housing ministry last week appointed former Newham council chief executive David Wood to undertake the review into the council’s “governance, culture and management of risk”, with communities secretary Robert Jenrick describing the situation at the council as “deeply concerning and completely unacceptable”.
Last week’s report from Grant Thornton castigated the Labour-run council for “collective corporate blindness to both the seriousness of the financial position and the urgency with which actions needed to be taken” after a £65m gap between available funding and commitments was identified over the summer in the council’s 2020/21 budget.
It said the financial position at the council had been worsened by £545m of borrowing in recent years to invest in companies, including Brick By Brick, along with property.
Croydon’s leader Tony Newman resigned last month as a result of the problems, with councillor Hamida Ali now in charge. Ali last week apologised for the financial crisis and announced the PwC review into the companies it owns.