A number of articles have been written in recent weeks about Spelthorne Borough Council’s investment strategy which the council considers requires correction. Since 2014, Spelthorne Borough Council, like all councils, has faced increasing financial pressures as a result of the withdrawal of government grants and in 2016 the council found itself facing a £5m budget gap per annum.
That year, following agreement from cabinet and full council, the council decided to embark on an ambitious but prudent programme of commercial property investments which included the acquisition of the BP International Centre for Business and Technology in Sunbury. The portfolio has continued to grow and now consists of 11 commercial properties in and around the borough1. These properties are rented on long-term leases to financially strong blue chip tenants. Also a large proportion of the total income benefits from having minimum indexed-linked rental uplifts throughout the lease term, ensuring the rental income will grow over the duration of the lease.
The council anticipates that in 2020/21 its investments will generate a surplus return over costs of £9.8 million p.a. This extra income enabled the council to make a rapid and comprehensive response to the Covid-19 crisis for example, by working with foodbanks to distribute over 220,000 meals to vulnerable people and welfare contacting over 99% of shielded residents, more than any other council in Surrey. It has also allowed the council to limit the rate of council tax increases, setting below inflation increases for the last three years, including the lowest council tax increase in Surrey for 2020-21. Many media articles have failed to acknowledge these benefits, despite the council providing detailed responses when approached for comment.
Compared to many other commercial assets portfolios Spelthorne’s portfolio rental performance has done exceptionally well in the face of Covid-19. For the rental relating to the March-to-June period due from 25 March, to date the Council has received 91% of the rent due and of the balance all but 1% is covered by rent deferral agreements. The council is not anticipating writing off more than 0.01% of the March commercial rent. The council has also secured an additional rental income stream of £3.67m p.a. in the last 12 months alone through letting activity and pro-active property management.
The fact that the council is facing a revenue budget shortfall, as are all councils, resulting from Covid-19 is due to the pandemic’s impact on service operational costs (for example providing food parcels to vulnerable residents and loss of service income relating to activities such as car parking). The revenue budget shortfall for 2020-21 does not relate to commercial assets. To be clear, Spelthorne is not one of the councils giving consideration to possibly having to issue a “Section 114” notice or an emergency halt to spend in order to balance its books.
The council has always been completely open and transparent about these investments and has published its investment strategy on its website2 together with a list of the investments made and ‘frequently asked questions’ which explain the council’s approach3 . Spelthorne has also widely shared the evidence it gave in May 2020 to the House of Commons Public Accounts Committee as part of the Government inquiry on local authority commercial property investments in England4.
Some articles have suggested that councils are not well-placed to make commercial investments but Spelthorne is keen to stress that it has created a dedicated team of individuals with extensive commercial experience and expertise from the private sector, whilst also working alongside professional external advisers where appropriate.
The council has always placed great emphasis on risk management and doing thorough due diligence. When the council acquired commercial assets it modelled for the following 50 years the risk of tenants not renewing their leases and resulting void periods and need to offer rent free inducements to successor tenants. These costs plus the need to periodically refurbish the assets have been taken into account in determining how much of the gross rental income the Council is setting aside each year to build up sinking funds as “rainy day” funds. Since the Covid-19 pandemic we have updated our worst case scenario modelling for the next 10 years and we are confident that our sinking funds are sufficient to protect the council’s revenue budget and council taxpayers from any adverse impacts on commercial rental income streams.
References have also been made to ‘unprecedented spending on office and retail’ but in fact less than 4% of the councils cumulative spend has been on retail. The council’s buy-out of the long leasehold for the Elmsleigh Centre in Staines-upon-Thames earlier this year was driven by a regeneration objective to protect the long-term prosperity of our town, not for investment purposes. Most importantly, it will also deliver new homes, including much needed affordable housing.
It is nearly two years since the council acquired a purely commercial asset for income. Our focus now is on soundly managing our commercial asset portfolio to minimise risk and maintain income, to deliver an ambitious housing programme to meet the needs of our residents and deliver regeneration schemes to protect the prosperity of the Borough, which in the face of the pandemic is more important than ever.
The council plans to hold a (virtual) public meeting to share further details on all of the above and will be releasing the date shortly on our website.
by Jennifer Medcraff, head of communications, Spelthorne Borough Council
Notes:
1. Within 30 miles of the council offices
2. https://www.spelthorne.gov.uk/capitalstrategy
3. https://www.spelthorne.gov.uk/article/18023/Property-investment-FAQs
4. https://committees.parliament.uk/writtenevidence/4209/pdf/
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