What is going on with the Figures? Application shows New-Build Making a Loss?

It has been said many times over this development that the new-build is there to subsidize the old.

So why, when we see the scant figures* provided by the Craighouse Partnership in their application, is the new-build actually LOSS-MAKING?

How, if this was the case, would it help subsidize anything?

Costs: Conversion vs New-Build

Conversion of Listed Buildings

The Craighouse Partnership have referred to the costs for converting the listed buildings in written correspondence. In one letter they claimed the conversion costs were more than double £10 million… In another letter  we were led to understand the conversion costs to be well under £22 million.

We were given more detailed conversion costs at the meeting with William Gray Muir and Mark Cummings of £125 per square foot. (Although we should point out that the Craighouse Partnership refused to agree minutes of this meeting and subsequently wrote their own – with most of the interesting information excluded. You may read about this saga here: see discussion under “Capital Costs”.)

All these assertions coalesce at approximately £20-£21 million, so we’ll stick with that.

Cost of the Newbuild

The application puts the total cost for both the construction of the new buildings and the conversion of the old buildings at a hefty £58 million.

On top of this, is claimed over £12m of fees and taxes. That means that the construction of the new houses must be around £37m, with at least £6m of extra costs for fees and taxes on top – i.e. £43 million.

This works out at over £250/sqft, twice as much as William Gray Muir’s quoted cost of converting the listed buildings of £125/sqft.

Wow.

As new-build is normally a lot cheaper than conversion – we appear to be looking at mightily expensive newbuild development here!

Great, you say. They must be going for something of quality.

But not so fast…

It’s clear, from the figures provided, that the sale price per square foot that the Craighouse Partnership are expecting for their houses is about the same as the average flat price in the area at £277/sqft (based on a study of prices on Zoopla) – but less than the average terraced house-price for the area. (Indeed, that price is even less than recent sale prices of flats on Balcarres St). So, these new build properties are comparatively low value.

East side of orchard

Including 55% of the £10million site price (as the new-build is 55% of the saleable properties) – the cost of the new-build goes up to £283/sqft, yet is only being sold for £277/sqft. Which means that, not only is the new-build not profitable, according to the Craighouse Partnership, but it is loss-making!

As we showed in the last post, the Listed Buildings themselves ARE profitable. With the cost of the Listed Buildings conversion just £193/sqft and with a sale price of a conservative £277/sqft – this gives a healthy profit on the old-build, whereas the new-build provides a loss .

This does not appear to make any sense. Even taking away some of the costs for new roads etc it still makes no sense. Remember, the roads are part and parcel of the new-build and not needed with a simple conversion of the listed buildings.

How, then, is it possible for the newbuild to be subsidising the old build? Unbelievably, it looks like it’s the other way round!

Listed conversion total New-build total Listed conversion/ sqft New-build/ sqft
Construction
£20,000,000
£38,344,200
£125.00
£215.42
Fees, taxes etc
£5,850,947
£6,509,179
£36.57
£36.57
Land
£4,402,516
£5,597,484
£31.45
£31.45
Total
£30,253,463
£50,450,863
£193.01
£283.43
Sale price
£38,857,363
£49,404,362
£277.55
£277.55
Profit
£8,603,900
-£1,046,501.27
£84.54
-£5.88

What is Going On?

Why on earth would a developer want all this newbuild – and such a lot of it too – when it ISN’T EVEN PROFITABLE?

Explanation One. The costs of the new-build have been inflated to a ridiculous degree to try and fit them  into the Enabling Development rules to make it seem like they aren’t making a huge profit from the new-build – when they really are.

Explanation Two.  Mountgrange have no intention of building the stuff and are merely looking to increase the land value of the site and either to  land-bank or sell on.

Queens Craig monstrosities

So – which is it?

Well, these explanations are not mutually exclusive and both could be in play at the same time. It seems clear that the costs have been inflated. Huge amounts of extra profits seem to have been “buried” in the construction costs and fees, thereby reducing the profit on paper to fit  with Enabling Development Guidelines. We estimate the REAL profits of the scheme are in the region of £30 million.

However, we need also to remember that Mountgrange call Craighouse “strategic land”. This is land that has a 5-10 year strategic plan on it and doesn’t need to be developed for many years. It is perfectly possible that Mountgrange have decided to  hedge their bets with a plan that will allow them either to build out the site or make large amounts of money merely by getting the planning permission without developing the site.

Of course, this has long been a suspicion in the local community. And if this is the case, the granting of consent for this new-build is a potential disaster for the site – because the likelihood will be that once consent is obtained the site will be more valuable undeveloped than developed. The site will then sit there for many years – like Donaldson’s School and like Caltongate (Mountgrange’s previous scheme) and the Listed Buildings will be in danger of falling into dereliction.

So what should the planning department do?

If we want the listed buildings to be developed as soon as possible,  and the landscape to be saved – the planners must hold out against the threats of the developers.

The example that the Craighouse Partnership always uses  –  Donaldson’s School – is an example of a site that was given planning consent for new-build. Strange though it is to understand – that is WHY it is lying undeveloped to this day. It became part of Cala Homes’ massive land bank which they advertised to their shareholders as the following:

“Having invested heavily in our growing land bank since 2010 we are now very well positioned to grow the business significantly in the next five years.

“Cala’s current land bank comprises 15,300 plots…which represents about 10 years output”

Once consent is achieved, a company can leave a site – which has, in effect, already made a profit on paper – for maybe 10 years. There may be no incentive for them to develop the site sooner rather than later – or even at all. They may well decide to sell it on a few years down the line and the whole thing can start again.

If a site such as Craighouse is sold on with such consents, new developers may well hold out for yet more new-build – having paid a higher price for the site. And so, this vicious circle starts again.

This terrible system is why so many sites are in the mess they are in.

The only way to make a developer actually get on and develop the Listed Buildings is to make this MORE financially advantageous than selling it on or keeping it as an asset on paper. And the only way of doing that is to not let them increase the land value without having to develop the site.

There IS a way of increasing the value of the site quickly and easily at Craighouse: by developing the Listed Buildings.

Allowing a consent for apparently “unprofitable” new-build will allow the land value to be easily increased with no extra expenditure, but the Council and community will then have no leverage to make sure the development happens.  If there is no real incentive to develop because the land value has already been increased by easy obtaining of consents, we are looking at a situation where the listed buildings could be under threat by being left, maybe for years.

The truth of the situation is that the Listed Buildings are profitable as we already showed in the last post, and would make a great conversion. The developers’ focus on excessive new-build takes the attention away from them and creates  a very high risk that they will go the way of  Quartermile (around half a billion pound loss and some important listed buildings demolished) or Donaldsons School (land-banked).

It is hard for planners and Councils in these situations. Developers play long games. But in this case the planners, Councillors and community must resist excessive new-build if they want development of the Listed Buildings to actually happen and if they want to save them and the spectacular landscape around them for the future.

——-

Note: This is the second of our financial analysis articles based on the current application. It should be noted that we have carefully studied the financial information available and we cite our wider research and assumptions in this piece. However, the Craighouse Partnership MUST release proper detailed figures under Enabling Development Guidelines and we would urge them to do so. This development needs proper public scrutiny.

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About friendsofcraighouse

A local group wanting to preserve the beautiful Craighouse Campus site in Edinburgh.
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