Sheffield Council is set to treble its planned spending on the Sheffield Retail Quarter project to over £180m.
Members of the council’s cabinet are being asked to approve the council taking out a new £35.8m loan, as well as the spending of up to £90m on the first phase of the project involving the building of new city centre offices for HSBC
A report by Simon Green, executive director of place at Sheffield Council, revealed the authority has considered the possibility of scrapping the entire project but has ruled ‘there is still a very clear strategic and economic case to justify the development’.
A total of £61.2m of spending on land purchases and enabling work has already been approved by the council, with over £50m spent so far.
The extra £35.8m is largely due to go on spending £26.9m on paying external advisors to ‘produce a scheme that is attractive to both potential tenants and funders’ for the second phase of the scheme.
A further £7.8m in interest payments and an extra £1.1m in direct costs the council are included in the new cost figures.
The first phase of the scheme is due to see the building of new offices for HSBC covering 228,000 sq ft.
The report said the office block will include 52,000 sq ft of space on the ground floor for retail and leisure companies, but no tenants have yet been secured for this area.
The report sets a £90m budget to develop this element of the project.
HSBC want the office to be open for its 2,700 city workers by early 2019 as it looks to move out of its current Griffin House site.
While that work takes place, further work is needed to show the second phase of the development - between Barker’s Pool and Pinstone Street - ‘is commercially viable and thus investable’.
Mr Green said no provision has been made for the extra loan costs in the council’s medium-term financial strategy and ‘if the project cannot realise sufficient returns then this would cause a budget pressure for the council’.
He said: “A significant proportion of the costs incurred are for the appointment of expert advisors which do not create a proportionate asset value.
“Therefore if the scheme does not proceed and there has been no appreciation in the value of the asset acquired those residual sunk costs would have to be charged to the revenue account.
“It is imperative therefore that proper governance is exercised over the progression of the scheme and that additional costs commitment will only be made if there is tangible evidence that scheme is positively addressing the viability issues it currently faces.”
The report added: “The do nothing option i.e. cease both the delivery of the first phase (the HSBC/retail block) and work on the wider Sheffield Retail Quarter scheme has been considered, but has many negative outcomes for the council.
“The status of city centre will continue to diminish, the council’s long term economic aspirations for the city and the city centre will become less feasible, there will be a lack of confidence for other projects and the reputation of both the city and council will also suffer.
“The council will also make a loss if the Sheffield Retail Quarter is not delivered as its investment to date in working up the scheme will be lost.
“As outlined in this report, there is a still a very clear strategic and economic case to justify the Sheffield Retail Quarter development, and in order to maintain project momentum given that there is now a major office tenant to accommodate the council will need to continue to act as developer/investor until such time as the scheme will be ready for the investment market.
“This will be when the Council has completed the designs, obtained construction tenders and achieved a required level of pre-lets to secure an income stream.”
Councillor Martin Smith, shadow cabinet spokesperson for business and economy for the Liberal Democrat group, raised concerns that Wednesday’s report will not be examined by a scrutiny committee.
He said: “We support the New Retail Quarter project and we welcome the recent announcement from HSBC about retaining a major presence in Sheffield to keep quality jobs in Sheffield.
“However, this project is very unusual as the Council wants to act as a speculative investor and property developer to build shops and office space which is not currently let. Cabinet are being asked to significantly raise the amount of taxpayer money currently invested in the project and this decision will not be subject to the normal level of scrutiny.
“Although we welcome any progress on the retail quarter project, we believe the Labour Council should be more open with people about the risks they are taking with your money.”
But Councillor Leigh Bramall, deputy leader at Sheffield City Council, said a quick decision is needed so work can start on the demolition of the Grosvenor House Hotel to allow for the construction of the first phase to begin.
He said: “We are pleased that there is a real momentum behind the Sheffield Retail Quarter. Working with our partners and potential tenants, we are now finalising a deliverable and commercially viable scheme to help create the vibrant city centre Sheffield needs to be successful.
“We have already approved funding for preparatory work to cover things like land acquisition and scheme design. Now, as planned, Cabinet is being asked to approve the investment to advance the next stage, which includes the construction of a large office and retail block on the site of the former Grosvenor Hotel. We need to approve this promptly so as not to delay the work.”