Purpose

As part of the affordable housing delivery
programme, in November 2021 the Council agreed to the acquisition
of a 161 unit residential development,
located at 3 Thames Road in the Royal Docks.  The scheme was originally due to complete in Q4
2022 however, due to significant planning delays, estimated
completion was pushed back twelve months.
 
Unfortunately, on the 9th June 2023, the
contractor working on the site (Henry Construction) filed for
administration.  Since this time, Reef
(the developer) have been tendering for a new contractor to
continue the development.  However, due
to the inflation of supply chain costs since the original contract
was agreed in 2021, there is now a funding deficit which the
Council are asked to help bridge.
 
The institutional funding structure sitting
behind the purchase, means the Council’s liability only
commences once the scheme has been completed and successfully
handed over.  Should this not happen
before a longstop date of 31st May 2027 the arrangement
terminates.
 
 
The report is seeking approval:
 
1.1  To an amendment to the
current funding structure (to be negotiated) in order to continue
the delivery of a much needed in-borough, purpose-built residential
regeneration scheme at 3 Thames Road, Royal Docks comprising 161
units.
1.2  To delegate to the
Corporate Director of Resources, in consultation with the Cabinet
Members for Finance and Corporate Resources, authority to conclude
the necessary agreements

Decision

Decision:

 
For the
reasons set out in the report and its appendices Cabinet RESOLVED
to Agree to:

 
i) 
The revisions to the current funding structure in line with the
proposals set out in this report.
 
ii) 
Delegate to the Corporate Director of Resources, in consultation
with the Cabinet Member for Finance and Corporate Resources,
authority to negotiate and finalise the legal and funding structure
(subject to those amendments not reducing the overall projected
financial return to the Council by more than 5% from the position
set out in this report at 5.2), and to take all necessary steps
prior to entering into required agreements.
 
iii) 
Delegate authority to the Corporate Director of Resources in
consultation with the Lead Members for Housing Management and
Modernisation, and for Finance & Resources, to determine the
arrangements for the Council’s letting of the Property to a
suitable third party housing organisation in accordance with
section 6 below, and to enter into the necessary associated legal
and contractual documentation, including leasing the Property.
 
Alternatives Considered
 

a) 
Do Nothing – the Council is NOT contractually obliged to
do anything in this situation. However, should it choose not to
participate in the arrangement, the Developer has advised that it
is unlikely to proceed with the scheme if an agreement for a
revised contract with the Council is not achieved.
 
b) 
If the Developer were not to proceed with
the development, the Council would need to find an alternative way
to address its housing need. In addition, the Council would forgo
the provision of enhanced levels of housing stock (at truly
affordable long-term rents), revenue to support the General Fund,
ultimate ownership, and would receive less affordable in-borough
homes in absolute terms. The loss of the housing stock proposed to
be provided to the Council by the development, is likely to cause
the Council to continue needing to fund provision of at least an
equivalent amount of housing accommodation through private sector
providers (bed and breakfast, and similar), at very considerable
cost over several years.
 
c) 
The Council would continue to incur a
cost for renting/paying for an equivalent amount of housing
accommodation through private sector providers over a 4-year period
(which may be the projected “lead-in” time for the
Council to seek to procure delivery of an equivalent housing
development of this nature, or a lead-in time to the Council
carrying out such a development itself, if the Council does nothing
and as a result the Development does not proceed), in the region of
£960k, compared with a projected net income to the Council
during the first 4 years of £586k (before cost
savings).

 
d) 
Also, the projected costs in 8.3 above,
assume that the Council would be willing to take the risk of
developing equivalent residential property itself, or to enter into
another agreement with a third party for provision of housing
accommodation equivalent to that to be provided by the Developer
and Institutional Investor. As both of these actions might involve
significant further financial risk for the Council (which might
exceed the already extensively considered and quantified risks
under the AfL), in the current economic
climate affecting local authorities generally, it may be that the
Council would choose
not to enter into such a commitment to deliver, or to
have delivered for the Council, equivalent housing. In such
circumstances, the Council’s additional costs of providing
other housing accommodation, if the Council does nothing and the
Development does not proceed, could be over a considerably longer
period, and therefore considerably greater than the amounts over a
4-year period in section 8.3 above. For example, if the Council
rents an amount of private accommodation equivalent to the
Development over a 10-year period, equivalent in numbers to the
Development, this would incur additional costs (allowing for
inflation, i.e. in today’s prices) of £2.2m.
 
e) 
There is therefore likely to be
considerable financial benefit/cost-saving to the Council in taking
steps (by varying the AfL as proposed)
to secure delivery of the Development, as well as the practical
benefits of enabling the Council or the Housing Provider (as per
section 6 above) to manage such accommodation (with the flexibility
which this provides, given constantly changing housing
needs).
 
f) 
It is possible that if the Council takes no action, the
Developer may still proceed with the development as planned at the
original cost and under the original commercial terms. However,
given the challenging economic climate, there is a significant risk
that the Developer might abandon the project if the Council
doesn’t agree to the proposed amendments. In exchange for the
Council agreeing to the proposed amendments, the Council will get
appropriate benefits, in line with the recommendations set out in
this report. In particular this will
involve an agreement that if the Development isn’t completed
within specified timescales, the Developer compensates the Council
for any additional costs incurred in arranging alternative housing.
Currently, the Council lacks this right under the agreement for
lease with the Developer.