CROYDON COMMENTARY: Another week, another multi-million pound company goes into administration. ANDREW PELLING says that the collapse of financial scheme behind a car park operator will have lasting repercussions for Croydon
There’s been a lot of action this week that has implications for Croydon’s future.
Westfield has sold out of the “Wastefield” investment in Bradford, a salutary example of how developers are not always able to deliver on grand plans for regeneration. Meanwhile, the BBC has reported a third item of bad news for Croydon in a fortnight, highlighting a report that Croydon is faring worst in London for closures of retail outlets.
Yet a piece of less-reported news may yet have the greatest significance for central Croydon’s status as a centre for shopping. The news that 127 UK car parks owned by Robert Tchenguiz and Israeli investors are to go into administration may yet prove hugely important for Croydon and its property speculating borough council.
Deloitte’s was appointed as administrator to the portfolio of NCP-managed car parks in the High Court on Monday. Financiers to the portfolio, Blackstone and the mainly state-owned Royal Bank of Scotland, had exhausted options to aid the owner of the car parks, Powerfocal.
Five years ago, after the initial Israeli investment, the car park portfolio was sold using the opco/propco structure so popular during the credit boom of the first decade of this century.
An operating company/property company deal is a business strategy in which a company is divided into at least two parts: a property company that owns all the real estate and assets associated with generating revenues, and an operating company that uses those assets to generate sales. It’s a way of buying a company without putting in very much of your own money.
Opco/propcos were the business structure that brought the Southern Cross care homes business to its knees. It appears that it has had much the same impact on NCP.
Powerfocal has £568 million-worth of debt and an ugly interest rate swap liability of more than £200 million. Its assets are likely worth a good deal less.
Croydon Council has its own love affair with financial engineering schemes. It claims, like a medieval alchemist, that they can produce gold out of base metal in creating a financial “special purpose vehicle”, or SPV, and building a council HQ supposedly “for free”.
Sleights of hand to create false understandings of value and risk are common in such structures. Opco/propcos typically made financial value out of nothing through the creation of separate arms-length operating companies (Opcos) that sold property companies (Propcos) to conservative investors eager to secure an apparently stable rental yield.
Such structures, aided by an easy money environment, drove asset prices ever higher. All was fine until the credit party suddenly ended. The sale to NCP of Croydon Council’s run-down car parks for £13 million in 2005 is only now beginning to look like a good bit of business on behalf of the people of Croydon.
If you wanted to employ someone for your City trading team, it seems that Croydon’s Labour front bench is the place to go looking, as their market timing, selling into a rising market and getting a premium price looks like a real positive on their CV. The high price secured, though, did leave Croydon with a car park operator who had to charge premium car park fees to fund a premium-priced asset. This hurt the town centre retail sector with cheaper car parking available in Sutton, Bromley and Bluewater.
It was the Conservatives, when they took control of Croydon in 2006, who displayed a poor feel for the market and less assured timing as they started to speculate with the borough’s money in the property market, buying buildings and land at the very top of the property boom, and just before things financial began to turn nasty. You’d not want them in your trading room being so easily carried away by the market’s bullish hysteria.
The Conservatives set up their own SPV to buy Croydon office properties just before the ceiling fell in, with global credit market seizing up. Instead of their private equity partners providing funding for development, the Conservatives found themselves having to borrow millions from the government, at the risk of local Council Tax-payers, then to lend on at an appallingly low rate of around 7 per cent, likely secured against an unbuilt building.
It’s little wonder that the full details of the convoluted financial engineering are firmly kept under lock and key at the Town Hall to hide the size of risks to Croydon. One suspects that no end of sins are being hidden, with crushing management fees a possibility, just as with many an ill-conceived NHS PFI project.
What’s worse, it seems that the Conservative council’s leaders have failed to learn their expensive lessons.
Using more Council Tax millions, they managed to pay top dollar for the Fairfield car park just 10 months ago, when the NCP’s financial position was already known in The City to be shaky. With a fire sale of the 127 car parks now likely, it seems that our council may have paid considerably more than was necessary, especially if the figure paid was the £16million reported for the clapped out car park that’s has its top floor fenced off from usage. The yield from car parking fees on the property at that ridiculous price is a paltry 6.3 per cent.
The unwinding process that comes with administration for stressed companies is unfortunate but ultimately a healthy one. When asset prices fall, lower parking charges will be the eventual outcome, something every retailer in central Croydon would welcome.
There could yet be another benefit for Croydon. If the distressed assets in the car park market make it possible for Hammerson or Westfield to buy some of NCP’s Croydon assets at more reasonable prices, thereby aiding their development plans for the town centre, that too will be good news.
Croydon Council’s poor judgement in playing the property market on the rates with off-balance sheet investments should be highly disturbing to Conservative voters in the south and centre of the borough, who traditionally turn out when they are convinced that their party offers best value for money. That message may get undermined in key wards like Fairfield, Waddon and Croham.
As has been seen with the City’s Libor manipulation, in the end, hidden details behind financial scandals do emerge. I expect that more will out about Croydon Conservatives’ casino economics.
- Mary Portas, Westfield, Bradford and a £1bn hole in the ground
- Inside Croydon: For comment and analysis about Croydon, from inside Croydon
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