Agenda item

The Commercial Property Investment Strategy (CPIS) was approved in December 2019 and refreshed in December 2020. A requirement of the strategy (Clause 10.4) is that a report is brought to full Council every six months to report on the commercial property investment activity and the performance of the portfolio. These would report the position as at 30 September and 31 March each year.

Since the last report was prepared, despite difficult market conditions resulting from Covid, four further properties have been purchased. These were a retail warehouse in Ayr occupied by B&Q, a retail warehouse in Birmingham occupied by Wickes, a car dealership in Stockton-On-Tees, trading as a Jaguar Land Rover franchised dealership, and an office in Birmingham occupied by the Highways Agency. Additional investment totals £28.70m taking the total amount invested in the portfolio to £44.06m by 31 March 2021 and increasing gross rental income of the portfolio to £3.25m per annum.

As part of the Financial Strategy agreed in 2019 the Executive set a net income target of £2m+ per year through commercial property investment. Due to a reduction in financing cost assumptions the updated financial strategy for 2020 increased this target to £2.9m.

The latest Medium Term Financial Plan forecasts, as set out in the General Fund Budget Report to Council in February 2021, included a projected Budget Gap rising to £3.5m in 2022/23 and reaching £6m by 2025/26. This gap took into account the targeted £2.9m income from commercial property investment.

The primary reasons for the scale of budget gap included a sharp reduction in core income to the Council from business rates and New Homes Bonus grant, which underlined overall funding volatility faced by the Council. Business rates and NHB combined to give £9.5m of annual funding in 2020/21 but this was projected to reduce to only £4.3m by 2023/24 – a fall of some £5.2m. Council tax increases alone were not adequate to offset funding reductions and service cost pressures, with a 1% increase in council tax income generating around £90k per annum in additional income.

The portfolio build was on track with a further acquisition completed in April and two properties currently under offer and scheduled for completion by the end of April which if completed will take the total amount invested to £68.6m of the approved £100m fund.

During this period borrowing costs remained low and therefore the Council’s average borrowing costs were still predicted to be around 1.5% per annum.

The Net Income budget for 2020/21 is £0.440m, reflecting an estimate of the pace of investment during the first year and part year rents on completed assets. Actual net income reported for the year is £0.614M, providing a surplus of £0.174M (40%) against budget.

Despite the challenging economic conditions facing UK businesses and the economy the performance of the portfolio had been strong. To date there had been no material rental defaults and during the period of September 2020 and March 2021. The market had seen a great deal of yield compression particularly in the retail warehousing and industrial markets. As a result the retail warehouse assets contained in the portfolio which were purchased earlier in 2020 would already have increased significantly in value potentially adding £1.75M of capital value to the value of the property.

Risk factors to property investment continues to be monitored. The immediate risks around Brexit continued to be assessed. The Covid pandemic remained and was continuing to cause difficulties to trading business and the UK economy as a whole. It is still too soon to know what the long term effects of the pandemic would be but a large number of investors had returned to the UK property market with demand increasing for secure income investment which had in turn been forcing up Capital values. Occupier performance and covenant strengths would continue to be monitored to identify any tenants that may be affected by the current market restrictions. In general it was not considered that the level of risk had changed materially since the last report in December 2020.

During the debate the following comments and questions were raised:-

·         The risk around receiving income based on rents was questioned.

·         Discussion took place around the target related properties and notional figures differed.

·         Rent payments had been received in advance, this related to the period of the end of this financial year, the incomes had been delayed to reflect the period, and this was common for tenants who paid in advance.

·         It was questioned if agents were used for the tenants and further information was requested on rent defaults and future rent increases.

·         The future market demand for commercial buildings was considered, the impact on the long term commercial market was understandably uncertain in the long term.

·         Concerns over interest rates were questioned, this was a recognised risk however the market remained strong.

·         Potential revisions in anticipated income was always possible in the future depending on the recovery and market demand.

·         Investor’s interest on returns resulted in property which in turn created a net income through rental opportunities.

·         The Committee considered that communications underpinning the strategy needed to be reconsidered, allowing for the large sums of money involved and the risks of the circumstances

·         The commercial legacy of properties would be incorporated at the December meeting.

The Corporate Scrutiny Committee reviewed performance against the Commercial Property Investment Strategy (CPIS) and supported the following recommendations to the Executive;

1.       For transparency, gross and net income from the commercial investments to be made more readily available from the six monthly reviews with a link to be provided in future reports to the SWT website where this information is posted.

2.       The communications underpinning the CPIS both internally and externally need to be improved upon considerably, as it was considered important that people understood what the Council was trying to do and why, and how this work inter-linked with the Corporate Priorities of the Council.

3.       The Corporate Scrutiny Committee was pleased to be informed that the legacy commercial properties will be incorporated in the next scheduled review paper that is to go to Full Council in December, but in advance of this, a light-touch document is requested to be circulated to the Committee.