Croydon Council has more than £1bn of borrowings – half of which has gone on Brick by Brick and the purchase of some commercial properties. Proposals contained in the Budget this week could put an end to that, as KEN LEE reports
Have I got news for you: Chancellor Rishi Sunak wants to pull the plug on some council borrowing
Rishi Sunak, the Chancellor of the Exchequer, in his Budget on Wednesday started sharpening the axe to chop down Jo Negrini and Tony Newman’s magic money tree.
Croydon Council has built up a mountain of debt, with more than £1billion of borrowings, most of it from a Whitehall-administered, low-interest fund called the Public Works Loan Board – PWLB. Buried deep in the detail of this week’s Budget were proposals to prevent councils from using PWLB funds for investing in retail property.
Of Croydon’s borrowings, more than a quarter – at least £260million – has been used on Brick by Brick, the council-owned, loss-making house-builder.
Another £200million has been used to buy commercial properties, such as the Croydon Park Hotel and the Colonnades retail and leisure centre on the Purley Way.
Croydon, and many other councils, believe that by using PWLB loans to “invest” in commercial property, they can use the rental income from the properties to make up for funding cuts.
But there’s growing fears that councils that have purchased shopping centres and high street stores could fall victim to the crisis sweeping British retail, and the government is now considering putting a block on borrowing from the PWLB if a council is using the debt to acquire investment assets to generate returns.
Croydon Council now owns this
Croydon was still using public money to purchase commercial property just over a month ago, with a further £14million spent on buying the site of the Selco building merchants on Imperial Way, Waddon, and the medical supplies specialist Alliance Healthcare at Vulcan Way in New Addington. Between them, the businesses employ more than 300 people. Now they have the council for landlords.
“Croydon Council has purchased two more local properties to provide rental income for its frontline services delivered to residents,” was the line taken by the Croydon propaganda office when they announced the property deals during the Christmas holidays.
“The council approved a £100 million investment fund and related asset investment strategy last year [2018] to purchase commercial property and bring in revenue funding to help with the borough’s operational costs. This has now been increased to £200million.”
The council claims that, after paying off the interest on its PWLB loan, these two properties will bring in around £330,000 per year.
The Colonnades, bought in 2018 for £53million, is expected to bring in approximately £1.4million a year, net of interest costs, according to the council.
“Faced with 76 per cent cuts to government funding at the same time as demand and costs are rising, we are always looking at ways to protect frontline services,” was the justification offered by Simon Hall, the council cabinet member for finances, at the time of the Selco and Alliance purchases.
“Investing soundly in commercial property is part of this. Taken together with leasing out areas of the council offices at Bernard Weatherill House, we are now generating over £5million per year for frontline services,” Hall said, doubtless relishing his role as a property investment high-roller.
But Sunak’s move is believed to be in response to lobbying from some Tory MPs who are concerned that local authorities in their constituencies are using billions of pounds of public cash effectively on a gamble in the casino of the commercial property markets. The global stock market’s plunge this week over coronavirus is a timely reminder of the kind of risks that are involved in broader investment strategies.
Other local councils (though not, as yet, Croydon), have used PWLB funding to buy into shopping centres, just at the time when the retail sector is facing an existential crisis: Intu, the owners the Trafford Centre in Manchester and the Lakeside complex in Essex, this week reported a £2billion loss in 2019, while the on-going commercial travails of Hammerson, the owners of Croydon’s Centrale, provides daily an object lesson of the risks inherent for investments in this sector now.
“The ‘experts’ in commercial property investment regularly get stung and can make huge losses,” a Katharine Street source told Inside Croydon this week.
“What makes the likes of Negrini and Simon Hall, and council staff with little experience or knowledge in property investment, think that they can play the markets using millions of pounds of public money and avoid those kind of pit-falls?”
The council offices – Fisher’s Folly – cost £150m, an example of a property investment failure
To reinforce such scepticism, the source mentioned CCURV, the property vehicle which the then Tory-run Croydon Council entered into with John Laing. Established in 2008, this “innovative” joint venture was meant to last 28 years, and transform council property and sites into big juicy profits.
CCURV was wound-up in 2016, with Croydon tax-payers saddled with Fisher’s Folly, the council offices which cost £150million, or at least three times over the odds, while the Taberner House site stood derelict for years – nothing happening until, ultimately, it was handed over to another set of private developers, together with a large chunk of what had been public open space in Queen’s Gardens.
“CCURV was a thorough-going disaster,” the source said. “When local authority staff dive into the shark-infested waters of property developers, they tend to get chewed up.”
That lack of real estate acumen was evident in 2018, when the council bought the Croydon Park Hotel for £29.8million – or £5million more than the asking price.
Croydon’s blundering council paid £5m more than the asking price for the Croydon Park Hotel
The government has already taken steps to make using PWLB money less of an attractive proposition for local councils, raising the cost of borrowing last year from 1.8 per cent to 2.8 per cent – though still much lower than commercial borrowing costs.
That rate hike has already caused Croydon additional problems around Brick by Brick developments. In Stevenage, Sharon Taylor, the council leader, was honest enough to admit that the rate rise would “trash” her council’s 30-year housing plan.
In Croydon, its investment “strategy” has also been questioned, as the purchase of a retail and leisure centre and hotel appeared to place the council into competition, however modestly, with the Croydon Partners, Westfield and Hammerson, who between them had plans for a £1.4billion retail and leisure centre, including a hotel, in the town centre.
“As a competition, it would have been a bit like pitching Miriam Margolyes over 100 metres against Usain Bolt,” said the source. “But it does make you wonder what the council’s real intentions for the Colonnades and Croydon Park Hotel might be – even the council’s execs couldn’t be so naive as to think that going head-to-head with Westfield would end well.”
The scaling down of Westfield’s grand scheme means something of a reprieve for the Colonnades – though suspicions linger that once the existing leases run down, the council is eyeing the site, next to the Croydon Hilton and alongside the Purley Way playing fields, for more housing.
The 12 businesses that currently occupy the site have for a while now been enduring disappointing customer numbers, or “low footfall”. At least there’s no immediate prospect now of a shiny new mega-mall luring away what’s left of their customers.
Now all Croydon Council has to do is somehow persuade Transport for London to get the 289 to stop at the Colonnades again to make it easier for people to visit.
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There is now a perfect storm in Croydon. We have three scourges brought together to create a toxin in our borough.
1. Tony Newman and Jo Negrini’s inept falling back to more and more cheap borrowing without effectively considering risk or long term consequences. Don’t forget, when these loans are taken out they are in your name.
2. Brick-by-Brick is the Council’s most conspicuous vehicle for blithely spending this money. Brick-by Brick is a Council owned property development company that is not accountable to shareholders or a board with any real interest in its operations.
3. The third scourge is Cllr Paul Scott riding coach and horses through good planning practice with his wife, Alison Butler, in charge of Brick-by-Brick and questionably-run Planning Department headed by Heather Cheesebrough, who employs and planning officer who is married to the Planning Director of one of the largest developers in Croydon.
The writing was on the wall three years ago- we’re now beginning to see what the price of this will be.