Agenda item

To offer information sufficient to allow the Overview and Scrutiny Management Commission to consider and discuss the effectiveness of the Council’s Property Investment Strategy so far and influence its review. The OSMC will scrutinise what has happened so far and the risks and returns.

The Commission considered the report (Agenda Item 6) that provided information on the effectiveness of the Council’s Property Investment Strategy to date to help influence its review. The Commission was tasked with scrutinising progress so far as well as the risks and level of return.

By way of background, Richard Turner explained that the proposal for the Council to invest in commercial property for the purposes of deriving revenue return was initially explored through a Corporate Programme project. This work resulted in Council approval of a capital budget of £50m in May 2017 for commercial property investment as part of the Investment and Borrowing Strategy 2017/18.

Council gave approval to increase this budget to £100m in July 2018. To date the Council had invested a total of £62.624m on nine properties.

Richard Turner then explained that a number of changes within the last year had created a circumstance where the Council was reviewing its Commercial Property Investment Strategy.

Difficulties had been encountered with identifying suitable properties which aligned with the Strategy.

Amended guidance from the Chartered Institute of Public Finance and Accountancy (CIPFA) and increased borrowing rates from the Public Works Loan Board (PWLB), coupled with emerging strategic direction related to the environment and housing, meant that the Council was currently reviewing its wider approach to investment. Commercial property investment would sit within that wider investment context.

Projected income was summarised within the report. The net income was after taking account of interest payments, Minimum Revenue Provision (MRP), fees and a risk fund.

Reference was made to the acquisition of 3 and 4 The Sector in Newbury. At the time of the investment, the Council’s property agent had confidence in the market and felt that tenants could be found and the agent advised the Property Investment Board in light of this. Unfortunately, the economy had since worsened and 4 The Sector was currently vacant. Considering the current economy/market, it was considered to be difficult to fully invest the £100m budget.

The vendor for 4 The Sector was paying the Council in lieu of rent for the vacant building until 31 March 2020 via an Escrow payment. This payment ensured that income was in line with the anticipated level from this investment. However, from April 2020 the cost liability would fall to the Council. Efforts therefore continued to find a tenant.

Councillor Lee Dillon queried the level of confidence in securing a long term tent for 4 The Sector. He acknowledged the importance of income generation, but queried whether the Strategy could be broadened to consider investments that would achieve greater community benefits such as affordable housing.

In response, Joseph Holmes explained that the Council could tolerate a lower level of income until 4 The Sector was tenanted. A net benefit could still be achieved for residents.

The Capital Strategy, presented to Council in March 2020, would set out different options for the investment of the remainder of the £100m budget. This fund was not fixed to investment and could be used in different ways but still needed to be utilised for housing – i.e. affordable housing.

Councillor Dillon felt that disposal of 4 The Sector should be considered as an option if a tenant could not be found as that would achieve a capital receipt (as long as the Council would not suffer a capital loss).

Joseph Holmes advised that options for 4 The Sector would be reconsidered if a tenant was not found.

Richard Turner explained that there was a yield target of 6% for the full investment of £100m. Properties of a lower level yield had not been pursued and therefore property investment to date was in line with the yield target.

Councillor Tom Marino referred to the other option considered in the report of continuing with the Strategy. Could this be pursued? Richard Turner explained that it was likely that investment would be restricted to West Berkshire only, this would severely reduce the potential for acquisition. The Council would focus on protecting its existing investment and the rate of return.

Councillor Alan Law queried whether the CIPFA guidance gave any further detail on the potential requirement to only invest within the district, i.e. when would this be imposed? Joseph Holmes advised that clarity was awaited from CIPFA, but the expectation of this made investment outside of West Berkshire a greater risk.

It was noted that Members would have another opportunity to comment on the Property Investment Strategy when it was presented to Council in March 2020 as part of the Capital Strategy. The OSMC could also revisit the Strategy at a later stage if Members had concerns or wished to review the further progress of the Strategy.

RESOLVED that the report be noted. The OSMC’s comments would be fed into the review of the Property Investment Strategy prior to its presentation to Council in March 2020 as part of the overall Capital Strategy.