BARRATT HOLMES, our housing correspondent, reports on how late  completion of developments by the council’s house-builders is storing up a multi-million-pound problem

Slowly does it, as the costs and interest charges all mount up

Brick by Brick, Croydon Council’s house-building company, could be struggling to make its sums work as delays and hold-ups in their delivery of homes for private sale is undermining the financing around its operations – which is based on hundreds of millions of pounds of tax-payers’ money and public borrowing.

“It’s a massive, multi-million-pound cash-flow problem, basically because none of their building projects are on schedule,” a Katharine Street source told Inside Croydon this week.

“And guess who’s going to be expected to bail them out?”

The multi-million-pound secret subsidies handed to Brick by Brick by Croydon Council through the deliberate under-valuation of most of the sites, some for as little as £1 each, as was revealed this week by Inside Croydon, “shows how desperate they are that BxB should make a profit”, according to one local property expert.

Brick by Brick was established in 2015. The masterplan was that, using unused or under-used plots of council property, it would use council money to build homes, half of which would be “affordable”, while the other half would be sold on the private housing market to help pay for the affordable housing. Or at least that was the theory.

In 2016, Brick by Brick’s first year of trading, when they had set-up costs but had built nothing to sell, they originally reported losses of more than £1million.

However, following the adoption of new accounting standards, the 2016 loss has since been re-stated as a mere £245,000.

This is because Brick by Brick is now “rolling up” interest on developments instead of charging it to the profit and loss account. This makes the results appear better now (no doubt to the relief of Jo “We’re Not Stupid” Negrini and Tony Newman at the council), but will be worse when the developments are eventually sold.

Then, all interest will then be charged against the profit.

There is nothing improper in adopting this accounting standard. But it may be that the resulting dent in future profits might have influenced the decision to sell the land to Brick by Brick at such bargain basement prices, in some cases for millions of pounds less than its full, commercial value.

Such under-valued transactions would be forbidden if the buyer was a third party, as the council has a legal duty to obtain full value on any sales of publicly owned property.

The below-value transactions would otherwise be difficult to justify unless there were problems with the sites that depress value. Yet that can hardly be the case in the two dozen land sales which the council has made to Brick by Brick, all of which came with planning permission – neatly secured for the company by Paul Scott when he chaired the planning committee.

One ironic consequence of the council perhaps being sensitive to the need to make a profit is that if Brick by Brick is successful in doing so, it will then be subject to Corporation Tax.

As one local property developer told Inside Croydon (asking not to be identified – “They can be a vindictive lot at the Town Hall”): “One has to hope that the council realised that by setting up Brick by Brick as a company are subject to tax.

“By charging full value for the land transferred, instead of the minimal amounts that they did charge, they would at least have mitigated that tax.”

There are other problems lying in wait for Brick by Brick. Even without the multi-million-pound disaster of BxB’s failure to secure land from Croydon College for the “Cultural Quarter” development, the latest business plan shows how far they have slipped against their own building schedule.

BxB chief Colm Lacey with the council CEO who  appointed him, Jo Negrini: how has he kept his job?

Last year’s business plan contained a list of 38 “active” sites showing the anticipated start on site dates and anticipated dates for completions.

That business plan depended on £88million-worth of sales being received by March 31 this year, from the sale of homes on sites which would themselves only be completed in December 2018.

With Brick by Brick’s first homes only going on to the private market in March 2019, it is clear that they have failed to raise anything like the £88million.

“This may not necessarily signal financial Armageddon, as expenditure may have slowed too, but it is symptomatic of poor control over the development programme and the potential for reduced margins,” is the view of the local developer.

Fairfield Halls: 15 months late and at least £11m over-budget under BxB

Brick by Brick, as a new developer, already has a pretty poor reputation for building on-time and on-budget. In 2016, the council handed the responsibility for overseeing the refurbishment of the Fairfield Halls to Brick by Brick.

A scheme which was supposed to take two years and cost £30million is now, best guess, going to take three years and three months and cost at least £41million. Who forks out the additional £11million-plus – Council Tax-payers or will it come from Brick by Brick’s bottom line? – has never been made clear by the council.

A comprehensive review of delays to Brick by Brick’s housing projects reveals a shockingly bad picture.

By comparing the timing of developments in last year’s business plan with that contained in the latest business plan, it appears that, even by the company’s own records, not a single one of Brick by Brick’s 38 projects has kept to schedule.

A breakdown of the delays can be summarised as follows:

• 3 projects with 3 months delay
• 4 projects with 4-6 months delay
• 25 projects with 7-12 months delay
• 5 projects with 13-18 months delay
• 1 project with 29 months delay

Three of the company’s four directors have been changed in the past few months. “Chief executive” remains Colm Lacey, who was previously the council’s executive director for development, but who last year was transferred off the Town Hall pay roll (where he has been on a salary of more than £150,000 per year) and on to Brick by Brick’s. So still effectively paid by Croydon’s Council Tax-payers.

“It’s a mystery how he’s kept his job,” was the view of the developer.

Brick by Brick’s new non-exec chair, Martyn Evans. His appointment was kept secret from councillors

As previously revealed by Inside Croydon – when Negrini and Newman didn’t bother to announce it to the council – a Devon-based businessman, Martyn Evans, has been appointed as chairman of the board. He replaced Jayne McGivern, who stood down at the end of January.

That was also when Lisa Taylor, now the most senior financial specialist on the council staff, was taken off the board of Brick by Brick to be replaced by Shifa Mustafa.

Like Lacey, Mustafa has no previous experience of running a multi-million-pound commercial development company. She is the Negrini appointee at the council as the £174,000 per year “executive director, Place”.

The policy of not having any public representatives – councillors – on the board of the council-owned company continues.

Following adverse publicity concerning Brick by Brick’s early losses, the company  responded by changing its accounting policies so that interest and labour costs are capitalised in the balance sheet, as work in progress instead of being charged against the profits, with the consequence that they will have lesser profits when – or if – those houses are sold.

Time means money in development, and a longer development period means that head office and central costs are spread over less work and a longer work programme, thus reducing overall margins.

This tendency for Brick by Brick not to meet its own financial projections could be serious.

Auditors Grant Thornton pointed out in their March 2018 review that Croydon Council’s own reserves have fallen significantly in recent years. The council’s reply, looking to the future, was that Brick by Brick dividends would help build reserves up again.

This should be seen in the light of the council’s medium-term financial strategy document, 2018-2022 which states, in relation to the dividends: “these are likely to [be] difficult to predict in timing and uneven between years”.

Late delivery by BxB housing could be trouble for the council’s finances

The suggestion that, by playing at being commercial developers, the council may be undermining its own finances through Brick by Brick and tempting disaster, seems to be coming all the more real, especially with some potentially volatile activity in the housing market in the next few years.

The overall cash requirements in the Brick by Brick business plan have changed from last year, too. In the previous business plan peak borrowings were £225million during 2018-2019.

Following the delays in delivery, they are forecast in the more recent plan as £185million in 2019-2020. However, for the purposes of cash-flow, these are offset by predicted sales receipts of £132million.

According to the local developer: “This very significant offset looks challenging.”

They said: “Only 438 units are due to be completed during the year, so it looks as if most of these would have to be sold, quickly, to bring in that much cash.

“Against the potential for a sluggish post-Brexit market, perhaps Brick by Brick forecasts are optimistic?”

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