Agenda item

Purpose: To consider any items called-in by the requisite number of Members following the meeting of the Executive on 2 November 2023.

The Commission considered the call-in of the Executive Decision (EX4402) on 2 November 2023 regarding the Property Investment Strategy Review (Agenda Item 6).

Councillor Iain Cottingham (Executive Portfolio Holder for Finance and Corporate Services) presented the background to the Executive report and the reasons for the decision. Key points were as follows:

·       There was considerable pressure to deliver a balanced budget in 2023/24 and various options had been considered to achieve this.

·       The main reason to divest the investment property portfolio was to comply with government policy, which stated that local authorities should not take undue risk with taxpayers’ money. The administration considered that being a buy to let commercial landlord constituted undue risk.

·       Although the Council had borrowed funds at a low rate of interest, and the portfolio was well diversified, the value of the assets had decreased since purchased 5-6 years ago.

·       Government guidance was to use capital receipts in order to achieve a balanced budget in current and future financial years. Capital receipts would allow investment of these funds rather than borrowing via the Public Works Loan Board at current interest rates (circa 5.7%).

·       There would be a capital saving by reusing capital receipts to reinvest for the benefit of West Berkshire residents rather than investing in assets right across the country, which would require capital investment of around £2 million over the next 10 years for maintenance.

Councillor Ross Mackinnon presented the reasons for the call-in:

·       A publicly stated strategy of divesting the whole portfolio by a certain date put the Council at a severe commercial disadvantage when negotiating with potential buyers.

·       The Executive paper included financial projections, which indicated that the properties could be sold at a significant capital loss.

·       Pubilcation of the above strategy would mean that the Council would receive
much less than they otherwise would have done.

·       There was an error in the financial description – savings of £6.9 million would be cumulative over the life of the Medium Term Financial Strategy rather than annual savings.

·       During the debate at Executive, more than one councillor had indicated that they did not fully understand the report’s financial implications, and Members of the Executive may also have struggled to understand these.

·       It was suggested that Members of the Executive did not have the competence to make the decision, since the Budget and Policy Framework reserved decisions on the Property Investment Strategy for Full Council. Any in-year changes could only be made by the Executive in very narrow circumstances, which had not been met.

·       The Monitoring Officer had indicated that the Executive had not actually made a decision to change the Strategy.

The Chairman invited Joseph Holmes (S.151 Officer) and Nicola Thomas (Deputy Monitoring Officer) to provide their advice as to whether the decision had been contrary to the Budget and Policy Framework:

·       It was acknowledged that the report should have been clearer that it would be taken to Full Council in February 2024 where there would be the opportunity for a full debate.

·       There would be no changes made to the strategy until a sale occurred. In the meantime, the Council would continue to generate receipts and maintain its properties.

·       The Part II report had proposed a disposal.

In considering whether or not the decision had been in accordance with the Budget and Policy Framework, the following points were discussed:

·       The report did not say that the Strategy Review would be referred to Council, and this had not been mentioned in the debate. Also, it had not been clear that the Property Investment Strategy was not being changed by the Executive. It was suggested that this position had been put up after the fact.

·       It was queried whether the Executive was acting in accordance with the current Strategy, or if they were actively seeking to divest. The latter was against the Strategy, which was part of the Budget and Policy Framework.

·       While the Property Investment Board had the power to dispose of individual assets, the change in strategy to disinvest would be considered at Council. This was as per the recommendation in the Executive report, accepting that the wording was not as clear as it could be.

·       Councillor Cottingham conceded that he thought the Executive had been asked to make a decision regarding the Property Investment Strategy Review on 2 November 2023.

·       The Executive paper should have clearly indicated that Council would be the ultimate decision making body, and that the Executive was only giving a view on the proposal.

·       The Forward Plan had listed the Executive as the decision making body.

·       If no decision had been made, then how could it be called-in?

The Chairman indicated that she was minded to debate the matter at this meeting rather than referring the matter to Council. This was agreed by the other Members present. Key points raised in the debate were:

·       The current administration had applauded the Property Investment Strategy when it had been introduced - it was supposed to be a long-term strategy that, if maintained, would ride out rises and falls in the market.

·       While the Council had been fortunate to achieve 100% occupancy and rental income, the current economic climate was different to six years ago. Retail rental was falling, office rental was not strong, and the commercial rental sector was heading for stormy waters. If the council’s portfolio was in line with the industry average of 70% occupancy, then it would not cover its costs. Divesting the portfolio now would reduce the risk to taxpayers.

·       The approach was perceived to be laced with prejudice and it was difficult to see how there could be a robust discussion.

·       Making public the intention to divest the portfolio weakened the Council’s position in relation to the value that could be realised from the sale of the properties. The decision was felt to represent a change to the agreed Strategy.

·       It was suggested that the only sensible course of action was to maintain the status quo.

·       The public was being consulted on the basis of a decision that had not been made.

·       The competence of the Executive to make significant decisions was questioned.

·       While the reasons for the proposed change in approach were understood, the speed with which it had been published would jeopardise the value of the capital receipts that could be secured.

·       It was explained that when local authorities had started buying commercial properties, they had collectively accounted for just 4% of the market. Montagu Evans had confirmed that publicity about the intention to sell, would make no difference to the price achieved - properties would be sold on the open market, and if offers were too low, then the properties would not be sold.

·       The Council was legally obliged to publish the book value price of its assets and the Executive was simply being transparent.

·       Unless there was an urgent need to sell, it was suggested that the Council should retain its assets, otherwise it would be selling at the bottom of the market.

·       A recent Council press release had indicated that the need for capital was just £1.5 million, so it was not clear as to why the Council needed to sell now.

·       Members asked to see the research that had shown that announcing the intention to divest the portfolio would not affect the sale price. It was suggested that the press release had created the impression of a ‘fire sale’.

·       Kevin White was asked if advice had been sought from Montagu Evans on the timing of the sale. It was confirmed that the Property Investment Board had asked for advice on how best to realise £10 million by selling some or all of the assets, based on: current market conditions; the asset management plans for each of the assets; and the likely value of the assets after costs.

·       Kevin White was asked if a rise in capital value could be expected If interest rates were to fall. He indicated that it was difficult to speculate and the right time to sell depended on the needs of the owner. Yields were set with reference to gilts, property related risk and illiquid asset risk. As gilt rates fell, then this would have a knock-on effect on total yield.

·       Kevin White was asked if advice had been sought from Montagu Evans about the wisdom of publicising the strategy with a specific end date. It was confirmed that they had not been asked this particular question. However, when a client started to sell assets, it affected the balance of risk across the portfolio, so it was logical to consider divesting over a period of time, so risk was not concentrated in a few assets.

·       The Council was in financial distress, the UK economic forecast was poor and interest rates were forecast to remain high. In order to create a fair deal for taxpayers, it was important to consider options. The Executive was being transparent rather than naive, and the proposed approach would give fair value to residents. Residents would expect the administration not to have political bias on this matter.

·       It was suggested that the Council should not be a commercial buy to let landlord in the current economic climate.

·       While the Liberal Democrats may have previously supported the Strategy, they had grown from four Members to 28 and the economic climate had changed in that time.

·       It was queried whether this was the appropriate forum to have the debate, since the matter would be discussed at Council. It was explained that the intention was for all Budget proposals to go through Scrutiny. The Property Investment Strategy (PIS) would be considered as part of the Investment and Borrowing Strategy (IBS), which would go to Council in February. This call-in was allowed to provide a proper and transparent debate around the PIS, which may not be possible as part of the wider IBS.

·       It was suggested that selling commercial property assets would contribute to rather than alleviate the Council’s financial distress, since their net profit was £1.3 million.

·       While transparency was welcomed, Part II items were necessary to deal with commercially sensitive matters. It was suggested that telling commercial property markets that the Council needed to sell its assets by a hard deadline was not commercially sensible and there were times when the Council should not be transparent in order to achieve best value for residents.

·       It was noted that if Members wished to discuss the individual asset proposed for sale, then that would need to be as a Part II item. It was confirmed that there was no need to discuss this aspect.

·       Councillor Cottingham could not recall a statement being made that the administration wished to dispose of all its properties in the short-term. The plan was to dispose of properties over a three year period.

·       It was noted that when the Council was buying its assets, it had made a similar announcement to that made recently in relation to the proposed sale. However, this was a very large market with thousands of potential properties, so there would have been very little impact on the market.

·       A question was asked as to what could be done to get a better deal for the taxpayer.

·       Members noted that in March 2023, Appendix D of the Capital Strategy had said that the Council was reviewing its assets and regularly challenging the purposes of assets, including the commercial property portfolio, and there may be opportunities in 2023/24 or beyond to sell assets to fund transformation activity.

·       The Leader of the Council expressed concerns about the call-in, if a decision had not been made by the Executive, but he welcomed the views of Scrutiny Commission Members. He noted that the proposed sale was in line with the Council’s published Capital Strategy. Values for the Council’s commercial properties had been published every year in the Annual Report. He reiterated the point that if offers did not represent best value, then then would not be accepted.

The Chairman suggested that while a decision had not been made, the Scrutiny Commission could still make recommendations to the Executive about what they would like to see in the Property Investment Strategy report prior to consideration at full Council, noting that the Property Investment Board had the power to dispose of properties up to the value of £15 million.

Resolved to recommend to the Executive that:

a)    they should not seek to dispose of all of the Council’s commercial properties; and

b)    they should not seek to dispose of properties by a particular date.