• Home
  • About
  • Subscribe
  • LATIF
  • Conferences
  • Dashboard
  • Edit My Profile
  • Log In
  • Logout
  • Register
  • Edit this post

Room 151

  • 151 BRIEF

    What's New?

  • Inflation ‘biggest concern for LGPS professionals’

    May 20, 2022

  • LGA calls for government support as regulators face staffing issues

    May 19, 2022

  • WMCA signs £4bn investment agreement with L&G

    May 18, 2022

  • Bill will give UK Infrastructure Bank power to lend directly to councils

    May 18, 2022

  • £400bn pension group collaborates on climate transition initiative

    May 17, 2022

  • CIPFA rejects proposal for vote on publication of fraud hub report

    May 17, 2022

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews
  • Briefs

Chris Buss: 151s and the sliding scale of development risk

0
  • by Guest
  • in Chris Buss · Development · Resources
  • — 11 Apr, 2016

Risk aversion in the public sector is shifting. But each model of housing development presents it own particular kind of challenge. Chris Buss runs through the options.

Building capital

Building capital

How much of a risk taker are you? By nature I’m naturally cautious, particularly with money – even more so when it’s not mine. Thus, I’m not one that would by nature follow the maxim of you need to “speculate to accumulate”.

That’s not to say that I don’t believe you need to invest to make a return, it’s just at what point does the nature of the investment become too risky, even if the promised, or supposed, reward is superficially attractive.

For much of my career in local government the public sector has become risk averse, largely to avoid, in part, public opprobrium when things go wrong, as it does spectacularly on occasion. However, I sense that this risk aversion is now changing.

In part this is due to the need to seek greater returns to balance reductions in direct government funding, or the indirect impact of government actions such as rent reductions.

But in part it’s also a reaction to the greater commercialisation of the public sector, with the sector taking the view: “Why should the private sector get all the upside (or profit)?”  One area in particular this is happening is in the provision of new housing.

Downturns and reform

Since the early 1980s the traditional housing delivery model has been that a local authority might assist a developer by selling land to them or, on occasion, assist them to acquire land. But the risk of development, and conversely the reward, for selling was a matter for the private sector not a council.

For those of us of mature years we can think back to the early 1990s when a number of large developers were financially burnt by the collapse in the property market. This reaffirmed in our consciousness that, whilst the property market may look like a one-way bet, and despite the trend of ever rising prices, it’s a fact that prices do go down as well as up in the short and medium term.

And it’s a fact that no one can predict the next down turn.  In addition, there’s the risk of reforms imposed by government such as recent rule changes on stamp duty which might impact returns.

Sliding scale

So what’s a reasonable level of risk with regard to housing for a council to take?

At one end of the scale we can have a council as the deliverer of council homes – a phrase that most people understand rather than the Orwellian nonsense of what is an affordable home.

A council would normally own the site, demolish what’s there at present (often if it’s a small scale development which involves converting redundant store sheds, garages or drying areas), get a scheme designed and then get a builder to build it with a council keeping ownership of the new housing.

Relatively risk-free you might think, until you find that the site surveys didn’t pick up on some contaminated ground, or sewer, which increases build costs to such an extent that viability becomes an issue – and that’s before the government changes the sums further by forcing a rent cut leaving such a scheme with a funding shortfall.  Even the simplest of schemes is not risk free.

As we move up the scale, in terms of both size and diversity of scheme, life becomes riskier, but potentially more rewarding for those willing to take the risk, as we come to the more typical development model.

In exchange for additional or reprovided social housing – often vested with a registered social landlord rather than a council – a developer builds out the private housing and keeps the sales proceeds.  In this scenario (which I’ve over simplified for reasons of space) the risk rests with the developer, but then so does the reward. The primary risk the council faces is the scheme not being built due to market conditions, and a potentially blighted site in a down turn.

Traditionally, local authorities sold land with a “light touch” in terms of planning, allowing the developer to negotiate a consent with the planning department and capturing all the value that crystallises when planning is granted.

However, by investing in planning briefs or full planning permissions, councils can capture all the uplift created by planning permission for itself, thus increasing capital receipts.

Whilst this requires up front revenue costs to secure planning permission, this is more than covered by increased value and, in many cases, the costs can be recovered (as revenue) as a condition of sale.

Moving up the scale we come to the joint venture where both a council and the developer pool risk and reward.

The extent to which this happens will vary depending on the nature of the scheme, the level of investment being pooled and a wide range of other factors.

Clearly a council is taking more risk in this scenario, but hopes to take some of the reward that would otherwise go to the private sector. The joint venture option will often require up front investment from a council which can be at risk.

The far end of the scale is where a council provides both the new council housing and, often through an owned vehicle, funds the council housing through building for sale private units.

This is effectively taking the developers on at their own game, hoping the council can read the market as well as the developers and be able to sell at the right price to cover the build, marketing and finance risks involved in the overall project.

Thresholds

I’m aware of local authorities being involved in housing development at various stages along this sliding scale of risk, and it’s clearly for each authority to decide its own risk appetite, almost on a project by project basis.

There’s no right or wrong answer as each of us will have our own risk threshold and level of expertise available to justify that risk threshold.

However, for those tempted to go for the higher risk thresholds, and at the risk of teaching you to suck eggs, make sure you do the due diligence and don’t assume that housing is a one way bet in terms of values.  Remember, at the end of the day no one loves a section 151 officer who loses the investment capital.

Remember, If it goes wrong it won’t be councillors who will be looking to carry the can. It will land fairly, or otherwise, on your desk.

Chris Buss is  finance director and deputy chief executive at Wandsworth Borough Council.

Get the Room151 Newsletter

Share

You may also like...

  • Impact Awards launch to celebrate finance teams 25th Mar, 2021
  • Stewardship of public funds: the way forward 18th Feb, 2022
  • Local authorities need to ‘invest in finance teams’ 27th May, 2021
  • Loans: The legal checklist for supporting enterprise 24th Sep, 2021

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 19 mins ago

    Investing today: nowhere to hide: Partner Content: Alex Stanley from Ardea Investment Management suggests that investors have few places to hide amid a synchronised sell-off in both bonds and equities. However, there are catalysts that[...] dlvr.it/SQlNVC pic.twitter.com/KkGGnduzPL

    Room151 21 hours ago

    Treasury to restrict PWLB loans to councils at risk of non-repayment: The Treasury has released new guidance that restricts local authorities’ access to Public Works Loan Board (PWLB) advances if there is a “more than negligible risk” of a council’s… dlvr.it/SQhLTV pic.twitter.com/vBsS7xMJdb

    Room151 21 hours ago

    Mixed reaction to proposed government intervention powers: There has been a mixed reaction to the government’s legislative plans to strengthen its intervention powers over local authority finances. The Levelling Up and Regeneration Bill has proposed… dlvr.it/SQhLMB pic.twitter.com/50foWxpPGs

    Room151 22 hours ago

    Post-Brexit struggles for national and local government regulators. @LGAcomms @NAOorguk Click the link below to read 🔻🔻 room151.co.uk/brief/lga-call… #Brexit #government pic.twitter.com/s3c8ySGy5G

    Room151 1 day ago

    CIPFA: a question of transparency: Roman Haluszczak’s campaign for publication of the independent report into the collapse of CIPFA’s London Counter Fraud Hub has been rejected again by the institute. He is now calling for[...] dlvr.it/SQgC5V pic.twitter.com/08fWsHFF4g

    Room151 2 days ago

    Back to the future for the PWLB: The Public Works Loan Board is tightening its lending criteria to ensure that loans will be repaid by local government borrowers. But, asks Peter Findlay, shouldn’t they have been doing[...] dlvr.it/SQcmmm pic.twitter.com/bVv4fe0Xlv

    Room151 2 days ago

    Great piece from Peter Findlay on the PWLB’s tightening of its lending criteria. He raises some pointed questions for the Treasury and explains why the ‘casino council’ characterisation was simplistic and inaccurate. #PWLB #localgov room151.co.uk/treasury/back-…

    Room151 2 days ago

    The Queen's speech highlighted the need for accelerating UK infrastructure investment into levelling up projects and cutting emissions. @UKInfraBank #QueensSpeech #ClimateAction #emissions Click the link below to read 🔻🔻 room151.co.uk/brief/bill-wil… pic.twitter.com/hFmF2veVIa

    Room151 2 days ago

    Huge funding heading to the @WestMids_CA from @landg. @andy4wm #LevellingUp #netzero #regeneration Click the link below to read 🔻🔻 room151.co.uk/brief/wmca-sig… pic.twitter.com/ajhZhia6mx

    Room151 2 days ago

    LGPS governance, Cagney and Lacey style: What regulatory response can be expected following the publication of the Good Governance project’s Phase 3 report and the closure of the Single Code of Practice consultation? Susan Black offers[...] dlvr.it/SQbfXf pic.twitter.com/xwqHOEu2AP

    Room151 3 days ago

    More evidence of the importance of emerging markets in the journey to net-zero. @BordertoCoast @BrunelPP @northernlgps @EAPensionFund @WYPF_LGPS Click the link below to read 🔻🔻 #LGPS #NetZero #NetZeroCarbon #EmergingMarkets room151.co.uk/brief/400bn-pe… pic.twitter.com/qCm0EGxzLn

    Room151 1 week ago

    ‘Urgent consultation’ issued in response to continuing audit delays: CIPFA and the Local Authority Scotland Accounts Advisory Committee (LASAAC) have announced another “urgent consultation” to consider proposals to address the latest issue that has led… dlvr.it/SQJ0kV pic.twitter.com/s6vw0bnGXO

    Room151 1 week ago

    Bags of capacity – now to housing delivery: HRAs have been freed up and councils are starting to invest, but some remain cautious, writes Steve Partridge. He suggests that a minimum of £10bn of additional borrowing could be[...] dlvr.it/SQDvxk pic.twitter.com/yZmoWzHv6U

  • Categories

    • 151 News
    • Agent 151
    • Audit
    • Blogs
    • Business rates
    • Chris Buss
    • Cllr John Clancy
    • Council tax
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Education
    • Forum
    • Funding
    • Governance
    • Graham Liddell
    • Housing
    • Ian O'Donnell
    • Infrastructure
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • Levelling up
    • LGPS
    • Mark Finnegan
    • Net Zero
    • Private markets
    • Recent Posts
    • Regulation
    • Resources
    • Responsible investing
    • Richard Harbord
    • Risk management
    • Social care
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Transport
    • Treasury
    • Uncategorized
    • William Bourne
  • Archives

    • 2022
    • 2021
    • 2020
    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story News round-up: council tax rises, Swindon’s solar bond, PWLB fair value figures, Housing association merger talks
  • Next story Manchester Roundtable: the flight from banks, collaboration and best practice

© Copyright 2022 Room 151. Typegrid Theme by WPBandit.

0 shares