Finance chief urges auditor scrutiny of PRS models
0Local authority finance chiefs have been warned to have the financial models of their housing and infrastructure developments independently audited to avoid the risk of errors before projects get under way.
The caution was issued by Jonathan Bunt, strategic director at Barking and Dagenham Council, while reflecting on his authority’s development of homes for the private rented sector.
He said that a mistake was found in the model for the council’s first project for 477 units on previously contaminated land.
“We had a hugely complex financial model… albeit it was a prudent model. But the single biggest piece of advice when you are exposed to this is to have the model audited by someone independent.
“I insisted on it and they found an error. It wasn’t huge and we fixed it. But [among] the range of things it’s worth getting sacked for, an error in someone else’s spreadsheet is not one of them…”
Bunt was speaking at the inaugural Room151 FD’s Summit on housing and infrastructure development finance. At the event, held at the London Stock Exchange, Bunt also revealed that Barking and Dagenham had placed the properties with its own housing team to let, but the department was still fully developing its distinct offer to dealing with properties going into the private rented market.
Bunt said that during a second phase of development in the borough, a small number of units had been unlet when the development was completed, reducing potential year one profits.
“That journey with our housing department has been an interesting one in getting them to understand the concept of private rented housing – and the expectation that goes with that, distinct from how we maybe work with social tenants. It is a journey we are still on,” said Bunt.
Barking and Dagenham has now completed two housing development phases, the second comprised of 144 units. All the properties are let at sub market rents, predominantly at 80% of market rent but with some available at 50% and 65%.
The first project was developed with institutional funder Long Harbour while the second was completed using a loan from the European Investment Bank. The council is now working on a third phase but has also identified a much larger ambition with a draft plan in the pipeline and potential schemes valued at up to £750m.
Bunt said: “We believe by investing money at scale we can generate net revenue cash for the borough that will help with financial sustainability, aid physical regeneration and help fund front line services.”
Bunt said before the development began the council had worked to clarify to the Audit Commission that it was not social housing and should therefore not be accounted for under the Housing Revenue Account.
“We did a lot of the legwork for the other local authorities that came after us in getting that treatment clear,” said Bunt.
He said that using an institutional funder on the initial deal had helped establish the distinction with social housing.
“In our conversations with the Audit Commission and DCLG, the use of an institutional funder, rather than a traditional local authority source like PWLB, helped put some distance in their minds between what we were doing and the HRA. That was quite important.”
Bunt said councils wishing to follow the example of Barking and Dagenham should consider a close-knit and empowered team to drive projects to completion.
But he also recommended sound tax advice for development projects.
“Make sure you get the right tax advice. It seems expensive but it will repay you umpteen times over,” said Bunt.
