Brick By Brick – how it works and what’s next
Brick By Brick is based on a very straightforward idea, which we explained in our blog earlier this year. Our model is one that many councils have adopted across the country – it’s a way to deliver much needed homes for local people, while retaining the value that arises from this process within the borough.
But while the concept of Brick By Brick might be simple, the development process isn’t, and our relationship with Croydon Council is also multi-faceted. This can be confusing.
And now, as Croydon Council is encountering challenges linked to its finances, exacerbated by the Covid-19 crisis, financial priorities may be changing. This has given rise to various reports about Brick By Brick, some of which are misleading.
So we thought we would take some time in this blog to clarify a few things.
Brick By Brick is delivering against its mission
Brick By Brick was set up by Croydon Council in 2016, at a time when the housing crisis in the borough was considered to be one of the most pressing issues which needed to be addressed. Our mission, as agreed with the council, was to deliver beautifully designed high-quality homes that would be accessible for local people, and to return the development proceeds to the council.
We have had a very successful year in financial year 19/20, completing 283 homes, of which 131 are affordable. Our draft audited accounts show a pre-tax profit and our development activity has also created c£6m of surplus land value, to be paid to the council as ‘overage’, as well as £14m to be paid to the council as interest on loans on sales completion of our schemes.
Of the homes we have available for sale at the moment, 90% are reserved and residents who have moved into a Brick By Brick home already have given us very positive feedback.
Brick By Brick is a local, independent, socially-responsible business
While Croydon Council is our sole shareholder, Brick By Brick is not part of the council. We are an independent company employing 42 people, many of whom are Croydon residents.
We agree our annual business plan with our shareholder (the council) and report monthly on progress. We have a rigorous process of project gateways, resident engagement and approvals processes to ensure that the schemes we bring forward are financially and socially viable, and we are working towards meeting the stringent ‘One Planet Living’ principles to ensure our homes and operations help combat the climate crisis.
Brick By Brick is not ‘gifted’ money or land by the council
Development requires both land and finance to be able to take place. In our case, the land in question tends to be initially owned by the council, and it is sold to Brick By Brick for development. We agree a minimum land value, and also an ‘overage’ to be paid when the scheme completes and is sold. This recalculates the land value to be commensurate with the scheme which has actually been delivered. So the council always benefits from the real value of the land (even if it is higher than expected) at the end of the development process.
We currently borrow our development financing from the council (rather than, say, banks), so they also receive all of the interest payable on the loans. So far, the interest which has been created by our borrowing from the council is c£14m.
We repay our loans when our schemes are complete
While it is absolutely true to say that some of our schemes have encountered delays, this is normal on a development programme like ours which involves many small difficult sites being delivered simultaneously. Delays can be caused by unforeseen issues such as Covid-19, additional works required on site, underperforming contractors or sub-contractors, regulatory/supplier delays etc. We update the delivery programme in our business plan to take account for this and this is scrutinised and approved by Cabinet annually. Our latest, approved in February 2020, forecasts that our loans to will start to be repaid later this year as our schemes fully complete.
Our financial performance has been strong, although not in line with our original predictions
Since Brick By Brick was established in 2016, we have delivered 283 homes across 15 different sites, and we generated £23m of revenue in FY19/20. While we have now started to make a profit, and creating significant land overage payments and loan interest payments for the council, this return is not in line with the original timescales foreseen in 2017. As noted previously, this is because we have encountered delays in delivering some schemes such as site issues, contractor difficulties, Brexit uncertainty and the Covid-19 pandemic. In addition, we rely on a great deal of input from the local authority which has become more challenging as resources in local authorities across the country have been significantly reduced over recent years.
We are resolving the issue we experienced with shared ownership
We experienced a delay in releasing some of our shared ownership properties to market because of a change in regulatory context which came to light at the point of exchange for some purchasers. This effectively meant that some couldn’t get mortgage funding from certain lenders unless the landlord was a registered provider, which was something we had decided not to do when Brick By Brick was first established. To resolve this in the most efficient way for our customers, we are now working in partnership with a third party registered provider. This will increase the funding options available to purchasers.
The council purchases some of our units to use as affordable housing
Brick By Brick was established to deliver a high proportion of affordable homes, including units at council level/social rents.
The intention was always for the council to purchase our affordable rent homes to address local need. Separate to this, Croydon Council have also had a ‘street property purchasing programme’ for many years. This programme purchases private homes from the open market to be used as council housing and reduce the housing waiting list.
Recently, the council agreed to spend c£30m on our available street properties rather than purchase homes individually on the open market. This makes a lot of sense for the council because our homes are new, well-designed, well-built and far cheaper to operate and maintain than second-hand properties. In order to have this decision approved, the council were required to prove a business case for the purchase of the homes which showed that the income they receive on them over time would justify the purchase price.
We do not buy land from the council ‘for £1’
This question has already been addressed in our blog earlier this year. For our initial site purchases from the council, we agreed a combined land value across a batch of sites. This was because we also had an obligation to deliver affordable housing across the batch, so it made sense to value them all together. Individual values still needed to be assigned to individual sites, meaning that some of the individual sites within the batch appeared to have minimum value of £1, but the valuation actually needs to be seen in aggregate across the whole batch of sites because the sites have common obligations.
As mentioned previously, all Brick By Brick land purchases include an ‘overage’ provision to the council, meaning that at the end of the development there is a recalculation of land value which factors in all of the actual costs and revenues on the development. Brick By Brick then tops up any minimum land payment to the council if applicable. This means that the land value that is actually paid is directly linked to the actual revenue generated by the development – i.e. the land value is always fair and fully justified.
Thus far we have generated c£6m in extra land value (ie overage) for the council.
Our internal design team trades as ‘Common Ground Architecture’
Brick By Brick has an in-house design team of qualified architects. Having an in-house design team benefits Brick By Brick in several ways, including providing design monitoring and compliance advice and also full architectural design services. All of these services would otherwise be outsourced at additional cost.
The main focus of the internal design team is on these two areas, but they also take on work for external clients with any fees payable benefitting Brick By Brick’s accounts and ultimately the council (as shareholder). In order to market these services, the team trade as ‘Common Ground Architecture’. This arrangement was made clear at our board meetings and features in our annual business plan.
What next for Brick by Brick
Spend pressures and Covid-19 have significantly affected the council’s finances to the extent that the council has asked for government assistance to meet spend pressures. As the council is our funder and sole shareholder, this is likely to have an impact on Brick By Brick.
A number of reviews have recently been undertaken relating to the council’s finances. Grant Thornton, the council’s auditors recently published a public interest report which recommends, amongst other things, that Croydon Council review its strategic investments, including those in Brick By Brick. This review has already been commissioned by the council and is currently being undertaken by PwC. There is also a ‘rapid review’ underway into the council by the government (Ministry for Communities and Local Government). Brick By Brick are working very closely with the council, government and their appointed consultants to service these review processes.
The council are due to provide an update and action plan relating to these processes at a special meeting of full Council in November 2020. It may be that Croydon can no longer choose to invest in the same way in initiatives such as Brick By Brick and in such an event it is important that we explore different options for how we can continue to deliver much-needed homes. For example, we might aim to seek finance from alternative sources or sell units in a different way.
This will be a topic for discussion between Brick by Brick and the council in the context of the review processes underway. The key overarching principle will be how we can use the demonstrable success and delivery capacity of Brick By Brick to continue to create value for the council which can help meet their current and future needs.
So, in summary, despite these various challenges and of course the new lockdown starting today, we are still very much open for business! All our active construction sites are open and operating within government safety guidelines. Covid-safe viewings are still taking place on our available homes, and we look forward to moving nearly 40 buyers into their wonderful new homes in time for Christmas.
Images by Rak Mafda and Jim Stephenson