1.0 Introduction
1.1 Organisation and Investment
Croydon Council is the administrator of Croydon, one of London’s boroughs. Croydon Council provides various services to the locals, including businesses and visitors. The services include children and adults, environmental, cultural, sports, housing, planning, and benefits (Croydon Council, 2024). Croydon is divided into 28 electoral wards that conduct elections in four-year cycles. The council administration is divided into three wings – the executive, committees, and the scrutiny. The executive plays the role of policy and plan formulation and later recommends them to the Council for approval. The executive is also responsible for directing departmental directors on the management and allocation of budgets. The committee has a unique role in auditing the Council’s activities. The scrutiny holds the executive into account through performance reviews.
Croydon is the largest employer in the borough, making it a significant player in the community. The Council has over 10,000 staff, including teachers (Croydon Council, 2024). As such, the Council spends nearly £1 billion per year (Croydon Council. 2024), making it an essential contributor to the economy. However, the Council has been under heavy financial strain in the recent past. Poor investment decisions have been affected by various risk factors, including compounding interest rates on loans (Butler, 2020). The Council has heavily invested in property development. One of these investments was the Council’s commercial property development company, Brick by Brick, which suffered significant losses and eventually collapsed (Waite & Jessel, 2021).
1.2 Significance of Investment in Industry
Croydon’s investment in Brick by Brick was an innovative approach to dealing with housing issues in the UK. Brick by Brick applied the Local Housing Company (LHC) model. According to Hackett (2017), the local housing model is a contemporary approach in which councils have part or full ownership of a property development company that buys, manages, and develops property within its jurisdiction. The housing company model is significant as property development has to become cost-efficient and customer-centric and deal with growing competition while also combining the social goals of the Council (Blome, 2010, p. 1).
The LHC is significant to the UK housing market. According to Beswick (2021), about 70% of UK councils have set up or are in the process of setting up a local housing company. The strategy is gaining traction due to the need to provide quality homes in the UK. According to the National Housing Federation (2024), unaffordable and inadequate housing is dragging the UK economy. Therefore, the Brick by Brick housing company investment was a significant step towards meeting the housing needs in the country as well as a step to prove that councils could indeed govern businesses to deliver social and economic goals.
1.3 Objectives of Investment
Croydon Council is wholly owned by Brick by Brick with the purpose of providing quality property developments – both residential and luxury. The Council had the aim of ensuring that it would maintain the economic benefits of owning a housing company. From the Council’s business plan for Brick by Brick (Baker & Lower, 2020), the investment aims at:
- Optimize the utility of resources to deliver more homes and housing.
- Assist the Council in benefitting through financial and savings targets through the provision of a premium dividend.
- Deliver efficiencies that will assist in securing improved facilities in the community.
- Assist in addressing various level policies to promote the development of property.
2.0 Discussion
2.1 Market Risk
Market risk is a common risk in various business investments. According to Adhikari (2020), market risks arise from shifts in market prices. One of the significant impacts on the housing market in the recent past has been the COVID-19 pandemic. When the reality of the pandemic, especially the lockdown, hit the UK, the effects were national and international, including in the property market. The government urged people to avoid moving houses as a measure to control the virus. As a result, the UK property sales had a 55% drop (National Property Buyers, 2024). Moreover, there was a negative impact on mortgages as they were more expensive, leading to a reduction in buyer willingness and ability to invest.
For Brick by Brick, the impact of the pandemic was significant. The government directives to halt construction as a mitigation of the virus spread created construction delays. In this way, the company was unable to deliver products to the market. Additionally, the pandemic affected housing prices, leading to a significant decline (Cheshire et al., 2021, p.3). Therefore, Brick by Brick was unable to sell houses at the target price. The company was also unable to deliver the number of houses its target for the period.
2.2 Liquidity Risk
Liquidity is an essential concept in any investment. According to Nikolaou (2009, p.14), market liquidity is where an asset has the ability to trade at short notice, at a low cost, with no significant impact on the price. Tian (2009, p.11) defines liquidity risk as the inability to trade an asset at a fair price within a short period or with immediacy. Therefore, a liquid asset can be quickly sold at any point within the appropriate market hours with a low impact on the price. The asset can fetch a competitive price quickly. The liquidity risk arises where there is a higher probability of losing a competitive price or selling at a loss if one sells with immediacy.
The UK housing market is patient. According to Thilini and Wickramaarachchi (2019, p.429), selling property quickly requires that they are sold at a loss or is highly undervalued. The UK housing market requires considerable time for properties to fetch an agreed price by parties (Haggbom & Asenius, 2017). As it was operating in the UK market, Brick by Brick faced difficulty in the quick disposal of units that were already complete, meaning it had to sustain its operations by continually borrowing from Croydon Council without delivering a dividend.
2.3 Credit Risk
Credit risk is when a borrower fails to meet their obligations as per an agreement. This risk mainly occurs when the borrower needs to meet the installment obligations. , the borrower defaults on the loan. In the housing market, credit risk may arise from mortgage purchasers being unable to meet their installments, renters being unable to pay on time (Wilhelmsson & Zhao, 2018), and in this case, Brick by Brick being unable to pay back Croydon’s initial investment. According to Liu (2023), most households purchase property through credit facilities where the property under purchase becomes the security on the loan. Therefore, a default on the credit translates into a loss of the property. In a volatile market, buyers may be unwilling to take the credit risk.
Brick by Brick was mainly funded through Croydon. Penn (2021, p.17) notes that little is regarded to be more obligation on the loan forwarded to Brick by Brick. The poor loan performance means that Croydon Council would consistently credit Brick by Brick with no eye on the performance of the loan portfolio. In this way, there was a high credit risk that Croydon took on board with little management oversight to ensure the loans would materialize to a premium dividend.
2.4 Social Risk
According to Lupu (2019), social risk occurs as a possibility of potential threats to maintaining social relations and cohesion due to adverse outcomes. According to Bekefi et al. (2006), social risk also encompasses human welfare and economic opportunities. The housing program for Croydon had a social and economic benefit attached to it. The social benefit was the focus on the provision of affordable housing units. In this way, the locals would have access to quality housing, benefiting their lifestyle and health and offering economic opportunities. The economic opportunities would be in the form of employment in the construction of the properties.
The failure of the project has had an impact on the perception of the project and, as such, has led to some negative social implications. To begin with, there was a failure to provide affordable housing to the community at a considerable cost. According to Galiven (2023), some of the community members have strong perceptions of Brick by Brick being the cause of the housing crisis at Croydon. Additionally, the collapse of the housing company shed light on the transparency and accountability issues, thus creating mistrust of the Council and the local community in regard to its use of taxpayers’ money and delivery of goods to society.
2.5 Operation Risk
A significant risk to any business is the operational risk. This risk results from poor internal processes and checks, especially in management, as well as from external events.
The management of Brick by Brick was delegated. Croydon’s initial approach to property development involved the use of own land and joint ventures with property developers. The company would gain some social and economic benefits from the agreement (Mustafa et al., 2017, p.3). However, in the new approach, Croydon delegated all the operations and management responsibilities to Brick by Brick, yet the company needed to gain prior experience in the industry. In this way, Croydon exposed itself to operational risks.
According to Gilmore (2023), there are significant loopholes in the checks at Croydon Council and risk management. The governance of the organization could have been achieved through more internal control processes and scrutiny of the decision-making patterns. Rudgewick (2023) adds that there needed to be an appropriate system of checks and balances on borrowing and loans. In this way, the operational risks at Brick and Brick are compounded, including delays in the delivery of construction projects.
3.0 Recommendations and Conclusion
3.1 Conclusion
The study reveals various risks at Brick by Brick. The credit risk is an important aspect to consider as it determines the ability to finance a loan facility and gain a return on the credit. The market risk is highly dependent on the external factors. In this instance, the COVID-19 pandemic significantly impacted the sales volume and housing prices in the UK. Additionally, Brick by Brick was unable to deliver on its quota of houses due to restrictions at the time of the pandemic. The housing market can be highly illiquid. As such, the liquidity risk has to be analyzed, especially in the UK, where housing requires time to gain the right buyer at the right price. The delegation of management of Brick by Brick as a novel company created various operational risks. In the process, Croydon took on operational risk, which meant it could only control a small quantity of the work at Brick by Brick. Additionally, Croydon should have taken time to analyze and engage Brick by Brick to analyze the utilization of finances and the plans to retrieve a dividend from the investment. The loss accompanying the investment is also attached to social backlash. The community that was to benefit from the investment has a negative perception of the project and the accompanying housing challenges. To this end, the society views the management at the Council as a failure and has implications of reduced trust.
3.2 Issues with the Investment
Various issues arise with the investment. The oversight was a significant factor in the investment. The strategies to ensure the vast amount of funding could be recovered needed to be stronger. Additionally, the borrowing strategies at the Council did not reduce the risk. Inside, Croydon (2020) notes that the Council would borrow at low interest rates and lend to Brick by Brick at a higher rate. This means a default by Brick by Brick would also mean Croydon would default on its borrowers. The pandemic also had a significant role in the failure of the investment. The loss of income-generating activities to Croydon means it needs help adequately funding its activities. The pandemic also affected the employment rate in the region, with about 30% job losses (Oxford Economics, 2021, p.52). This also means the Council had to deal with other issues, thus failing to focus on its investments.
The investment was excellent and advisable. However, the management of risks could have been better. The investment is in line with the Council’s core functions. Moreover, the investment would have been an additional source of income for the Council, thus promoting independence from the national government. In the future, there is a need to consider the delegation of some of the duties to experts to deal with risks.
3.3 Recommendations
- The Council should have instituted an appropriate risk management policy. According to Abdul et al. (2020), risk management policies in the public sector have a significant impact on protecting public assets. An appropriate risk management policy would assist in dealing with issues that arise.
- Another strategy would have been a transfer of risks through outsourcing of various work. For example, the Council would have partnered with a reputable commercial development company to assist in setting up its operations and teaching various business loopholes to succeed.
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