Why selling the unsaleable is not the answer on Brick by Brick

CROYDON IN CRISIS: It is nearly three years since this website began exposing the financial disaster that Brick by Brick was creating for Croydon Council. NICHOLAS PANES, the construction industry expert who advised on our reports, looks at the options for extricating the council from this mess of its own making 

Following the issue of a Section 114 notice by Croydon Council, the scramble begins to balance the yawning gap in the budget. The council is under a legal obligation to produce a balanced budget. Stripped of any meaningful amount of reserves to fall back on, this will require concessions from government.

One such concession is that Croydon may be allowed to sell capital assets and use the proceeds to meet revenue expenses to keep services running. Northampton Council, which issued a S114 notice in 2018, closed libraries, cut back on subsidies for bus services and a number of other services, but in addition, it had to raise more than £100million from various capital disposals, including the sale of the council office building.

At first sight, selling capital assets may appear an obvious thing for the council to do, an easy way to raise money quickly, but despite being overstuffed with non-core properties, Croydon has invested so badly that in the current climate, it may struggle to do so. A bankrupt hotel will find no takers until the covid-19 crisis is past and the Colonnades shopping centre is not only adversely affected by the virus but stands in the middle of a potentially seismic shift towards online shopping.

Inevitably, this focuses a spotlight on the loss-making house-builder Brick by Brick, which has used £250million of public money.

Brick by Brick has been funded by Croydon Council with a series of loans. In their report published this week, Price Waterhouse Coopers pointed out that some of these loans were in default, Brick by Brick having failed to make any repayments or pay any interest.

To make these loans, Croydon Council borrowed the money from the Public Works Loan Board, a body controlled by the Treasury. If Croydon fails to make repayments or interest payments to PWLB, then a receiver could be appointed who would take over the task of selling assets to reduce debt.

PwC’s damning report on Brick by Brick pointed out poor financial controls, limited management accounting and the absence of cash flow forecasts. They laid out seven options for the future of BxB.

The council’s options for dealing with Brick by Brick – none of them are expected to return to Croydon Council Tax-payers all the money that they have shelled out on the failed house-builders

PwC’s conclusions are that the least-worst option for Brick by Brick is to continue to trade with a limited build-out of current developments or continuing with some of the early tranches of developments (see the two left-hand blue boxes on the chart). PwC does point out that this would involve further borrowing before it yields results.

They will be doing much more work before the options are fully assessed. It is already quite clear that some of the options simply will not work.

In July – months after financial distress signals had already been sent up from the Town Hall – the council agreed to purchase 165 properties from Brick by Brick through the borrowing of another £30million. It appears that this was done to provide Brick by Brick with further funding, either to continue building or to pay back to the council as interest, thus removing the “defaults” on some of BxB’s loans. The council’s external auditors, Grant Thornton, flagged up concerns about this deal as being unusually “circular”.

How Private Eye covered the attempted £30m bail-out for Brick by Brick

PwC warned that the price paid for these properties should be reviewed to ensure it is proper market value. I would go further. Croydon is bankrupt. It should now be substantially reducing borrowings, not adding to them. Buying-in these properties which were intended to be sold (many as shared ownership homes) simply locks in the associated debt for the long-term.

The contracts for this purchase have yet to be confirmed and the latest advice given to the council by its auditors and consultants is that this deal should be halted.

So what are the council’s options for dealing with Brick by Brick?

Sale of BxB

It might seem odd that PwC has discounted the quick and easy solution of simply selling Brick by Brick. However, like me, they must have concluded that it is currently unsaleable.

Brick by Brick has a record of little or no financial control, poor forecasting and an inability to deliver construction and development on time. We know that certain properties, like those in the co-ownership scheme, have problems attached. They could not be sold because the company somehow forgot to get registered as a recognised provider of shared ownership homes.

One of PwC’s recommendations was quickly put into action – sacking Colm Lacey from his seat on the company’s board of directors

We also know of disputes with contractors that have caused long delays on some sites and that some of Brick by Brick’s sites are odd, comprising small pieces of ex-council land that most commercial house-builders would not try to develop.

These problems mean that any purchaser of Brick by Brick as a whole has several messes to untangle. For the council to put together decent information for potential buyers might well take months because it appears that record-keeping within Brick by Brick has been far from perfect. Any corporation buying Brick by Brick, rather than just some of its properties, faces an additional layer of legal due diligence to ensure that BxB has complied with the law and to ensure that liabilities are understood.

Furthermore, given Brick by Brick’s lack of success, who would want to inherit the depleted management team and the staff of the organisation, when in all probability they have people of their own?

Finally, there is an issue of reputation. Resistance against Brick by Brick developments has become stronger and stronger, linked to Croydon’s willingness to grant inappropriate planning consents. Many commercial developers may prefer to avoid this.

All of these pitfalls make it unlikely that Croydon could readily find a buyer for Brick by Brick. In any case, if they did, the price might be little better than that achieved on closure.

Closure of BxB

PwC shows two options under the heading of closure: winding-up and managed winding down.

Winding-up implies an immediate cessation of all physical construction and the attempted sale of everything “as is”. As Brick by Brick has so many sites still in construction, this means that a lot of construction contracts would be breached, creditors may lose money, and Croydon would be left trying to sell unfinished building sites to anyone that would take them on.

Marston Court is one of the BxB sites where homes are only now being sold, years behind schedule

As Brick by Brick is a company, it is uncertain whether the government would stand behind its debts. While those who trade with Brick by Brick would be entitled to think they have no more risk than if they were trading with government, I doubt whether this is correct – could the council and the Treasury just let BxB collapse?

While some residents might think this is somehow appropriate, it seems likely to be the option which would yield the least cash, create a flurry of litigation while damaging the community and Croydon’s built environment the most.

A managed winding down, by contrast, is certainly a credible option.

Calling a halt to any new developments, the council would simply seek to sell all finished properties and complete sites that are currently in construction. Any consented sites that have not been started could be offered for sale. They would have to be, as the council, like any public sector body, is under a legal obligation to get best value for its assets, locking in the additional value that the planning consent has created.

Continuing to trade

The options presented by PwC under the heading of continuing to trade include “limited build-out”, “build out all of tranche 1 and some of 2”, and “do nothing, trade as is”.

While PwC identifies the first two of these options as the least-worst, I am not sure if in practice they differ much from a managed winding down. Presumably, if Brick by Brick builds out certain sites but does not advance any of its longer-term plans, that leaves open the option to build up the business up again in better times. I am not sure the residents of Croydon or Croydon’s lenders would like that very much, and Option 3, “Continue as is”, seems out of the question.

Importantly, however, the council must try to get best value for its assets, so this may require an orderly wind-down or continuing to trade with more limited scope, at least in the short term.

The Big Picture

Despite the claims of Colm Lacey, now the company’s former director, the future of Brick by Brick is wholly dependent on its owner, Croydon Council.

Many residents now feel that Brick by Brick should never have been created, and I would be surprised if its future life is a very long one. However, in the short term, it will be big picture economics with a pinch of politics that determine the way forward.

How the homes on Marston Court, in Upper Norwood, are now being marketed on the Brick by Brick website. £630,000 for a smallish three-bed house?

In order to reach a sensible decision on the future of Brick by Brick, a deep-dive into its books and records will be necessary. The legal status of every site, site boundaries, ownership, restrictive covenants, debts secured upon them, estimates of future construction costs, forecasts of cash requirements, and so on….

A list of assets that are ready for sale will be prioritised and the costs and benefits of completing further properties will be considered. Balancing the need for haste against the need to raise cash will be difficult as this is, in every sense, a distressed sale.

And what of Croydon Council’s main lender, the Treasury? Will they turn a blind eye to the low prices achievable by prioritising the need for debt repayment? Will they allow any further borrowing to facilitate a “build-out”?

It was a Conservative government that introduced legislation to allow local authorities to undertake commercial activities. It is clear that this system was not fully controlled and has been abused by Croydon’s Labour-controlled council.

Surely it is obvious that the public sector has never been any good at running commercial businesses?

Surely it is obvious that public money should not be used for highly cyclical and risky activities like property development?

Much as it will upset some residents, the best outcome for Croydon Council Tax-payers may be to allow Brick by Brick a little leeway to finish some of its developments. By yielding maximum cash from this source, some local authority services will be preserved.

One big worry for the future is any Brick by Brick sites still without planning consent. Brick by Brick has continued to submit applications for sites – there’s one in Thornton Heath due for consideration at Thursday’s planning meeting.

But what will the Treasury impose on Croydon? Will the council rush to create further cash by granting planning permission on more sites? Can proper control be imposed on the planning process when Croydon is so conflicted by the need for funds?

That, as they say, is another story.

  • Nicholas Panes is a former finance director in construction and development with experience of selling sites on behalf of public sector organisations

Read more: Brick by Brick gets 100%: 38 housing projects are all delayed
Read more: Building towards the council’s financial ruin, Brick by Brick
Read more: £63m ‘slippage’ in council budget caused by Brick by Brick

About insidecroydon

News, views and analysis about the people of Croydon, their lives and political times in the diverse and most-populated borough in London. Based in Croydon and edited by Steven Downes. To contact us, please email inside.croydon@btinternet.com
This entry was posted in Brick by Brick, Business, Colm Lacey, Colonnades, Croydon Council, Croydon Park Hotel, Planning, Section 114 notice and tagged , , , , , , , , , . Bookmark the permalink.

15 Responses to Why selling the unsaleable is not the answer on Brick by Brick

  1. You can imagine the conversations between Jo Negreedy, Tony Newman, Paul Scott, Alison Butler, Colm Lacey and Simon Hall before BrickxBrick was instigated. What could go wrong? We sell the company council sites at hugely knocked down prices, we employ a submissive CEO, we lend it money if they start to wobble, we do the odd council job ourselves (Fairfield Halls – over budget and delayed) and then we guarantee planning consents to ourselves.

    Roll the clock forward a couple of years and Jo Negreedy has been sacked, Tony Newman instructed by Labour HQ to stand down as Leader of the Council, Colm Lacey(CEO of BrickxBrick) has been forced off the main board and Scott, Butler and Hall have been sacked from Cabinet.

    All largely because of BrickxBrick.

    They can’t even guarantee their planning consents anymore as Head of Planning, Heather Cheesbrough Is understood to be ‘leaving’ the council.

    What a shit-fest!

  2. CentralCroydon says:

    A couple of other things to be aware of. BxB still has an expensive lease on its flash offices in George Street. As Lacey has now been removed as a director, a quick look at the company details on Companies House now shows there are no current directors. When a company finds it has no directors it is in breach of the Companies Act 2006.

    Can it get any better?

  3. Anthony Mills says:

    I’d like to take issue with Mr Pane’s statement ”Surely it is obvious that the public sector has never been any good at running commercial businesses?”
    I don’t think it is obvious, except as part of the privatisation ideology which has destroyed much of our public services, and in which Mr Pane appears to have been a willing participant. I seem to remember millions of council houses being built in the 40s, 50s and 60s by council departments.
    The second point is that such building is definitively not a commercial business, it is to provide subsidised social housing at subsidised rents, which has been militantly prevented since Thatcher as providing a built in base for social organisation and communities – and labour voters. One of the reasons that BBB has failed is the same dilemma facing all housing associations and councils trying to provide housing at truly social rent, not the Orwellian doublespeak of ”affordable rent”, which at no less than 80% of market rent is completely unaffordable by those who most need housing.
    That is that the only way left open by Tory ideological market rigging is to cross-subsidise social housing by selling the vast majority of any building that can be achieved at the market price, ridiculous and utterly unattainable except to the fortunate few. The cross-subsidy model was universally recognised as inoperable by all providers some years ago. This is no defence of BBB, or of their egotistical proponents, but it must be recognised that councils have had to try desperate and devious methods to try to get round this deliberately created structural impediment to them building truly social housing.

    • Nicholas Panes says:

      It is very difficult to find examples of successful businesses who had their origins in local authorities. This is of course a completely different issue from national privatisations by central government.

      Council houses were never run as a commercial business but as a valid part of housing policy without a financially measured target profit and loss.

      Finally, Brick by Brick may have claimed to be following the doctrine you recite above but if you add up the so-called affordable content in their business plan, it is disappointingly low. What they were doing was acting as an incompetent commercial developer with a token cross-subsidy “affordable element”.

      Indeed I would venture to guess that Croydon’s recent willingness to buy various properties (although they could not afford it) is at least in part to cover up the black hole at Brick by Brick and not originally planned.

    • Lewis White says:

      In the 1970s and 80s I worked for Lewisham Council, which had an Architect’s department staffed with architects, building surveyors, and a host of other professionals in their area of construction design, costing and management, plus a borough engineer and surveyor with structural engineers who supplied structural design services. External consultant architects and enginers were also employed.

      The traditional process of design, specification and tendering to suitable building contractors, with site inspection of the works in progress by council clerks of works, and the architects themselves, was followed.

      The council purchased many run down properties and terraces. Some were refurbished– others demolished and replaced with new blocks and estates, many of which were excellent in design and layout.

      The guiding force behind this was Councillor Nicholas Taylor, who was also an achitectural historian and author of a key planning / conservation book–the Village in the City. His ethos involved consulting the local residents — and in conserving where appropriate, traditional terraced housing and buildings, as well as building new.

      A few years ago, he was very unfairly treated in a BBC documentary about slum clearance, and his huge contributions to architecture, housing design and conservation, totally ignored.

      Some of the talented architects I knew are still in practice, but most by now retired.

      I occasionally drive or walk past some of the buildings and estates created at the time.
      My part was the planting of the landscaping of the sites. I feel proud to have known Cllr Taylor (to a very small degree) and been part of a proacative council who designed in-house, and built some excellent architecture which provided modern homes for local people to rent (aka Council Houses and flats).

  4. I expect that the more competent of BxB staff will be seeking to leave ASAP. That will further diminish the value left in the company and also affect the viability of the options. Regrettably the same staffing issues will apply to the Council as those that can further their careers elsewhere will most probably seek to do so. You can’t blame them for that.

  5. Hans Mien says:

    What a complete cock up. Game of Monopoly anyone! I think the children in my family would give them a run for their money. A recommended game this Xmas.

  6. Chris Flynn says:

    On a bit of a low-brow tangent…
    I see the Colonnades regularly disparaged on Inside Croydon. It seems strange to describe it as a shopping centre to me – its main business are clearly (nationwide chain) restaurants. Even with takeaways (which might not slow down in popularity after lockdown), it seems those business are thriving, and geographically offer an interesting location within Croydon. I agree you’re not going to go there for an afternoon of browsing, but would you pop along there in the evening with a family (or teenaged friends), knowing that there are lots of choices/alternatives? Probably. I don’t know how it works out for the council economically, but you can’t say those businesses are suffering.

    • We have never “disparaged” the Colonnades, nor described it as a shopping centre (which it is not). We’ve just highlighted the poor trading record of many of its tenants, its inaccessibility and the premium (ie. too expensive) price paid for it by the council.

      Saying “I don’t know how it works out for the council economically” sounds as if you have been briefed by Councillor Simon Hall, because he had no idea, either, when he was cabinet member for finance pushing through this poorly researched and ill-advised purchase.

  7. Lewis White says:

    Thanks Nicholas Panes and Inside Croydon for this excellent overview of the B by B situation and future possibilities .

    I would agree with the statement “Importantly, however, the council must try to get best value for its assets, so this may require an orderly wind-down or continuing to trade with more limited scope, at least in the short term.”

    Prices to buyers on individual developments could be reduced– but ony if the local market will not stand the existing asking prices.

    I for one would not wish to see a bargain basement (for the buyers) mass sell off.
    To flood the market would be deeply unwise, and I suppose needs to be balanced with the costs of security and servicing the loan if a development were going to be “mothballed”.

    If -as reported in another article in Inside Croydon- developers are putting in large numbers of planning applications for flats and houses– just like the designs of brick by brick’s architects– these same developers must have considerable faith that their developments will meet a ready sale in a few years time.

    So why should B by B flats and houses,most of which are further through the development pipeline, be so different ?

    Presumably, the location on existing former “council estates” would affect achievable sale prices relative to “new luxury flats in prestigious location in quiet close, near to Purley town centre and station” and the like, but it can’t be chalk and cheese– more like different qualities of cheddar. Surely they are very “des.res’s” ? The price needs to be sensible, admitedly.

    One hopes that the new Directors of Brick by Brick will be getting knowledgable saleability and pricing advice from experts (with proven experience and bound by a code of conduct from a respected organisation like the RICS)- in selling Croydon property.

    With regard to “yes or no” to the question of completing developents that are already started, I think the best way forward is a definite “YES”. Stalled developments are inevitably a financial and environmental mess at best, a disaster at worst, and a huge expense in all cases. Houses and flats need to be built, roofed, and sold before weather and vandals get in.

    Let the developments be completed (and–by the way– INSPECTED PROPERLY during , not after construction to avoid risk of costly problems after completion) and then sold off in a sensible time scale at full or reduced price.

    In my view, many of the designs from Brick by Brick are good, and will provide attractive, well-designed homes.

    But wisely review the way forward for EACH development, yes, totally necessary.

    I wish the new Directors–and staff members of Brick by Brick who are not authors of the current situation, success in sorting out the best future path.

  8. moyagordon says:

    Having just read an interesting piece on BBC’s website about the double pandemic in Italy of COVID and the Mafia, I couldn’t help seeing similarities with the financial situation Croydon Council is in, the vast sums of money it has lent out to BxB, wasting money purchasing hotels, etc, resulting in severe cuts to services. The piece describes how years of political mismanagement and plunder by the mafia who have infiltrated public services, ran up massive debts leading to, in Italy’s case hospital closures and savage cuts. Sounds scarily familiar.

  9. Andrew Lipscombe says:

    Cheap land, off market planning applications, off market access to liquidity via zero cost equity (which costs the competition 50% of their profit I might add) and cheap senior lending – as someone who works in property development myself I strongly feel that protagonists in this debacle should not just be embarrassed and un hireable going forward they should potentially be in jail for misappropriation of public funds.

    I disagree with prior comments, anyone still there shouldn’t be hireable as they should have left a long time ago recognising any one of the fatal floors in the business highlighted by Inside Croydon. And I suspect there is a lot more to come.

    That said, I suspect there is value in the assets held by the company to someone in the know. Therefore with a bankrupt council on our hands I’d proceed with caution re just getting rid in a fire sale.

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