Officers at cash-strapped London borough recommend sale is halted despite ’reasonable’ offer
Croydon council is set to reject an offer by Urban Splash to buy its troubled housebuilding company, despite concluding that it represents good value.
A report published late yesterday for the council’s scrutiny committee said the council was intending to reject the offer for Brick By Brick – which it confirmed for the first time was from regen developer Urban Splash – and instead build out more of Brick By Brick’s programme itself, before winding the business down.
The likely decision comes as Croydon council attempts to rebuild itself under the guidance of government-appointed inspectors after effectively declaring itself bankrupt last November, with a cash crisis blamed by auditors in part on the failure of Brick By Brick to repay £200m of loans.
In February the cash-strapped London borough said it was planning to wind down Brick By Brick, which has built over 300 houses to date, in the autumn this year unless a buyer could be found.
However, yesterday’s report makes clear that council officers are now proposing that Brick By Brick be retained by the council but kept alive until 2023, by which time it will have built almost 800 homes.
This is despite the fact Savills, which had been engaged to assess the offer from Urban Splash, concluded “the principles of the offer are not unreasonable”, while PwC found “no evidence that the financial standing of the bidder should rule them out as a suitable acquirer of BBB”.
Housing Today understands that Urban Splash’s offer would have underwritten the vast majority of the debt owed to Croydon council by Brick By Brick, thereby taking it off the council’s balance sheet, while removing from the council the cost and risk associated with build out.
In addition, the council report makes clear that “There is no disputing the fact that the build out option has higher levels of risk than the sale option”, with a sale allowing the council “to concentrate resources” on other parts of the Croydon Renewal Improvement Plan.
The report also says that “the largest risk of build out is management failure and collapse of Brick by Brick”, and says it expects to have to bring in a third party firm to manage the business as and when existing staff leave – the cost of which has not been made public.
However, the report said building out much more of Brick By Brick’s programme than originally anticipated does have the potential to generate more income to ultimately pay off more of the debt to the council than the sale option. It concluded: “On balance, although the build out option has a higher element of risk, a number of those risks can be mitigated. On that basis, together with the potential of a higher return, it is recommended that the sale option and offer from the bidder is rejected.”
The report says the net loan write-off required under the build out option would be between £27m and £53m, while the sale would require between £54m and £68m to be written off. The build out option will see 23 sites of the 29 sites originally allocated to the firm built out, with the rest returned to the council.
The council’s recommendation to build out the homes is understood to have been heavily influenced by the Improvement and Assurance Panel appointed by the government, which includes former Balfour Beatty exec Phil Brookes, now a Crown Representative. The report includes a line thanking the panel “for their advice and support in the production of this report”.
Brick By Brick staff are understood to feel that the decision to extend the build out endorses the value in its business, but had been nevertheless hoping the sale to Urban Splash would go through in order to ensure a future for the business, once seen as a pioneer in the council housing company space.
Croydon council leader Hamida Ali said: “Our priority over the future of Brick By Brick has always been to find a solution that both secures the best possible return for the council’s investment on behalf of our taxpayers and provides much-needed genuinely affordable homes for local people.
“We have thoroughly explored our options to find a way forward on Brick By Brick that represents the best possible value for our taxpayers, and I want to thank all our expert external advisers for their important contributions on this.”
Brick By Brick declined to comment.
The scrutiny committee is due to consider this report on July 6, before a council cabinet makes a final decision on July 12.