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  • Writer's pictureAdewole Ademolake

Public Vs Private Sector | Is there a difference between the two sectors | Property Development

I have been privileged to work in both the public and private sectors from a property development perspective.


Property development from all spectrums generally reaches the same destination, but different pathways are taken. This article will seek to explore the differences.


For this post's purpose, the public sector is a local council or housing association, and the private sector is a private developer or housebuilder.


If you want a nine to five go to the public sector- False


Some people think that the public sector is easy, but this is far from the truth. On top of managing very complex projects, you have to consider multi-layered stakeholder engagements; ward member inquiries, judiciary reviews, genuine consultation, public procurement, and tons of reports. If you want to learn practically and theoretically, then the public sector is the place to be.


The private sector is a place where you work hard and reap the rewards. If making money is the motive, then you will generally work from nine till it is done. Financial reporting is very demanding in the private sector


Between the public and private sector, I think that the public sector is arguably more challenging. I say this because everything you do must stand up to public scrutiny.


Both sectors have their challenges, and managing developments present similar challenges irrespective of the sector. I have worked very unsocial hours in both sectors, and I am sure they have both contributed in some way to my unfortunate hair loss.



Development appraisals from both sectors


I started my career working in the public sector; however, whilst studying for my masters, the topics generally covered the private sector's approaches.



In plain terms, the public sector tends to focus on the long term viability of a scheme, whereas the typical housebuilder will be focused on banking profit as soon as the scheme is practically completed. The critical point to note is that property investors, student accommodation providers and REITS will generally focus on the long term viability of a scheme.


The public sector tends to use discounted cash flows to establish a development scheme's long-term viability. Affordable housing, especially social/ target rent, is unviable even when including grant, but these tenures may look much better if reviewed over 50 years (assuming inflation). The KPI's that the public sector tends to include are as follows:

  • Net Present value

  • Internal Rate Return

  • Payback period

  • Operational surplus

  • Yield on cost

The above performance indications allow the public sector to assess schemes over a long term period. I have worked in public sector organisations that assess schemes over a 20-50 year period, therefore allowing schemes that would not usually be affordable to become viable when assessing over the long term. The long term perspective allows the public sector to deliver larger proportions of affordable housing rented schemes. Plus, the public sector benefits from the most competitive interest rates and can use grant funding.


However, the typical house builder-developer will use a residualised calculation to determine the profit for a scheme. Everything, including parking sales, affordable housing sales to a registered provider and private sales, makes up the gross development value, which dictates the final profit when subtracting costs( land, professional fees, interest and build costs etc.)


The typical metrics used in the private sector are:

  • Profit of GDV

  • Profit on costs

  • ROCE


From a development appraisal standpoint, the basis of calculation of viability is different, but only because both sectors' motivations are different. The private sector primarily exists to make money, whereas the public sector seeks to bring homes forward that the general market wouldn't otherwise provide.


The planning process


People feel that securing planning is so much easier in the public sector, but this is far from the truth. Public sector schemes undergo a more thorough review, even when considering that most public sector schemes seek to maximise affordable housing. The public sector must consult with the community and the various stakeholders and ensure that everyone is brought along. This, in itself, can make things harder to move projects forward and should not be taken for granted. In the public sector, there are no shortcuts, and everything must be substantiated. Everything must stand up to public scrutiny. Is planning guaranteed in the public sector, the simple answer is NO.



However, working in the private sector can be a little less bureaucratic, but the stresses are still evident. I personally think that the private sector is able to get away with much more and maximise density. The private sector can appeal decisions as and when the opportunity arises but it may not be favourable within the public sector even though some housing associations appeal decisions.


Appointing consultants


The private sector is not subject to public procurement regulations and does not have to adhere to OJEU rules unless they are bidding to purchase sites from the public sector. This difference makes working in the private sector more straight forward as procurement rules per se do not drive you unless additional controls are put in place by your firm.


However, the public sector is driven by public procurement regulations that are pretty challenging as it takes forever to get a consultant appointed. Please click here to read my earlier article on procurement.


Similarities between a public and private developers


The pathway towards a home being built is similar in that an architect will have to be instructed, a project team procured, consultation, planning application submitted, builders found, building stage, and then the new homes are ready for occupation. This process is the same, whether it is the public or private sector. The thought process, the consideration, the intense reviewing of plans/ planning policy, project managing, stakeholder engagement and the pressure points in terms of viability is consistent between both sectors.





The differences


The goals are similar but not the same. Each sector wants to deliver homes, but the reasoning is different. The public sector has statutory powers that can be utilised, whereas the private sector doesn't. The private sector is not bound by public procurement and, at times, can make quicker decisions. Public sector decisions can be slower due to the various approvals needed (cabinet etc.) before moving things forward. The private sector's motivation is to make money, but where this is also the case in the public sector, the long term outlook is another factor that separates both sectors.


The focus on money in the private sector translates into a laser focus in identifying all efficiencies. The level of scrutiny given to plans, elevations, materials, landscape strategies, simple things like window reveals, M&E strategies, unit sizes/ mix, and standard building components was mind-blowing. I do not think I have seen this level of scrutiny into design in the public sector.


In the public sector, their focus on public consultation is unrivalled. I have experienced the true meaning of genuine consultation, where the respondents' views are genuinely taken on board. The public sector is willing to include certain features in a scheme as they are generally designing schemes with the community in mind.




Who designs better?


This is a loaded question that will likely create much debate between property development professionals. In my mind, perhaps the private sector does in some ways whilst the public does in other ways. The private sector design gives the people what they want (nice finishing specifications), whereas you will get what you need from the public sector. My observation is that the public sector creates impressive homes that are easy to maintain. Simultaneously, the private sale sector may not always consider the practical side of ongoing maintenance with the same energy as the public sector as they sell homes and move on.


In terms of budget spent on design, my experience is that they both spend similar amounts of money on architects fees. The unfortunate truth is that the private sector builds their homes cheaper than the public sector. What may be an expensive design feature to the public sector may be reasonable to the private sector as they have greater influence over building trades and their supply chains.


About design, which is more important to you, needs or wants?


Who's better, the public or private sector?


The private sector is best at delivering desirable schemes at speed and with unrivalled desirability. Without the private sector, the 300k housing target will be unachievable. They say that innovation comes from the private sector, and I am reserved to agree with this but in current time's the public sector have been doing a fair share of innovation. The public sector produces terrific research on what has worked and what hasn't that maybe isn't so forthcoming in the private sector.


The public sector is the masters at enabling development on sites that would otherwise be impossible to build. Councils have statutory powers such as compulsory purchase order and the power to appropriate land for planning purposes which effectively does away with private rights. In recent years, it has been seen that the public sector is becoming more active in property development, and perhaps one day, they will outperform the private sector?


Conclusion


In conclusion, both the public and private sectors need each other. They both contribute to the housing target and must continue working together. We have seen public/ private joint ventures where the public sector put in the land and the private sector secure planning and do the build. The coming together of both sectors is promising, and I hope it continues to deliver more housing for the varying needs of a growing population in the UK.


We are one industry, and we can tackle the undersupply of homes together.


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