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A council will hand its housing company a £13.1m bailout to avoid it going into liquidation amid concerns over the impact of the COVID-19 crisis.
Labour-run Norwich City Council has agreed to increase the loan facility for its housing company, Norwich Regeneration Limited (NRL), from the £11.4m maximum agreed in November up to £21m at a cabinet meeting last week.
The council – which is the sole shareholder in NRL – will also purchase up to another £3.5m in newly issued shares, taking its equity investment stake in the company to £6.2m.
An officer’s report to the cabinet meeting said NRL had written to the council asking for support because of a “cash flow issue” caused largely by the coronavirus pandemic’s impact on housebuilding work and potential sales.
NRL would be unable to pay contractors to complete its flagship Rayne Park scheme and would enter liquidation “without further cash financing”, it added.
The bailout package represents “sufficient funding to cover the costs of the development as well as company overheads and interest costs”.
But the council still expects to see a £6.1m loss on the next phase of the scheme with no impact from COVID-19 – which could rise to £10.4m if the pandemic causes sales delays and a drop in sales prices.
That is still less than the projected £11.1m if NRL went bust, but the report admitted that its losses could still “prove to be greater than if the council refuses the loan to the company” if coronavirus’ effect on sales is particularly severe.
“This additional financing does carry significant financial risk but this needs to be balanced against the potentially greater risks inherent in winding up the company,” the report said.
NRL would likely lose the £5m it has already invested in the scheme without any homes being completed without extra funding, it added.
The loan – which the council acknowledged “may not be fully recoverable” – will carry an interest rate of 4.5% above the Bank of England’s base rate.
Norwich Council set up NRL in 2015 to help meet housing need in the city and generate a new income stream.
Work began on the 1,000-home Rayne Park scheme in 2017, with 174 Passivhaus homes delivered to date.
The authority is currently undertaking a review of the company’s approach to commissioning development.
In future the council will likely change its focus “towards the delivery of affordable rather than open market housing” due to greater financial capacity in the Housing Revenue Account, the report noted.
A spokesperson for Norwich Council said: “The council has prudently planned against any risks and has money put aside to support the company in order to weather the ups and downs of the housing market.
“Clearly there will be challenges ahead that no one could have predicted because of coronavirus and the effects this may have on the housing market so this is being kept under constant review.”
The council added: “It was always anticipated that it would take time for the company to make a profit and we built this risk into our financial planning, including allowing for loans where necessary.”
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