A strong focus on risk mitigation “from day one” makes Spelthorne Borough Council’s long-term borrowing plan secure, according to deputy chief executive and section 151 officer Terry Collier.
The council’s level of debt has been cited as being close to £1.1bn, or £10,415 per resident, with much of the borrowing used to fund investment purchases. The big numbers sparked concern in a CIPFA review and prompted the government to order a Best Value Inspection into the “clear financial risk” presented by the debt-funded investments.
But according to Collier, over the next 44 years the outstanding debt figure will steadily reduce to zero, as the council structured all its long-term debt, so it steadily pays down on a year-by-year basis. This compares favourably to some councils where this was not the case, he notes.
Over the 50-year financing period of its investments the council says it will generate an income stream equating to approximately £2.5bn, of which debt financing and management costs will equate to £2bn – leaving a net contribution towards the council’s services over 50 years of £500m.
“Effectively the council has taken out the equivalent to a 50-year repayment mortgage at a fixed rate interest of 2.33%,” Collier tells Room151. “In 2023/24, the council reduced its net long term outstanding debt by £14m. Over a 50-year period the net contribution on £0.5bn equates to approximately a £5k benefit per resident rather than a cost per resident.”
Commercial investment company?
CIPFA’s report also highlighted its concern that Spelthorne was “not so much a council with a commercial property portfolio as a commercial investment company that happens to run a council”.
Asked whether this was a valid claim, Collier says that CIPFA had “rightly” identified that it is important for councils who are managing significant investment asset portfolios to have the right skills in place to do so. Spelthorne does indeed now have a “larger assets team than the average council”. But Collier emphasises the advantages of skilled colleagues having been recruited, with a number coming from the private sector “with extensive experience of managing investment asset portfolios, equally our multi skilled team have extensive experience in the remit of public sector asset management”.
Collier points out that the assets skills capacity at Spelthorne had also helped facilitate the completion of a single person homeless hostel, emergency accommodation for families [both assisted with funding from Homes England] and the commission of the world’s largest Passivhaus accredited wet and dry leisure centre.
The council’s assets approach enables it to take a longer-term approach and to support local businesses. A recent example is Elmbrook, where the council is facilitating the retention of three local small businesses by letting half the ground floor to the companies. Its purchases of communications house and the Elmsleigh Centre in Staines-upon-Thames are intended to support the economic prosperity of Staines and future place making within the town.
“The council is successfully running a wide range of services including, unusually for a lower tier council, a range of independent living services including day centres, meals on wheels and community alarms,” Collier adds.
Addressing other government concerns about Spelthorne’s affordable housing plans, Collier notes that the council “has already stepped back from its ambitious affordable housing programme, which was focused on addressing the housing needs of its residents”.
In October 2023, the council decided to step back from directly seeking to deliver and finance affordable housing itself and removed £284m from its future borrowing plans, he points out.
“Instead, the council intends to use its assets in a place making and joint venture strategy to generate housing outcomes without requiring it to provide debt finance. The reason for this decision was that the significant rise in interest rates, combined with construction inflation, had resulted in the council’s affordable housing schemes no longer being viable,” Collier states.
Back to the beginning: investment principles
How did Spelthorne’s current treasury management strategy arise and what led to an investment programme that has sparked much discussion?
According to Collier, the council’s acquisition of investment assets in the period 2016-18 was in response to the impact of austerity funding measures, with general Revenue Support Grant support for the council’s budget having ended.
“At the time we were facing the prospect of negative grant starting, where instead of the council receiving grant, we would have potentially started paying the government,” he says.
Spelthorne therefore put in place a set of strategic investment parameters to form its strategy, which was built around generating long term sustainable income streams to offset the loss of grant income and cuts and to rebuild the financial resilience of the council.
A strategic objective, through the use of sinking funds adjustments, was to aim for a consistent annual contribution to the revenue budget after covering from rental income, interest payment, annual debt reduction payments and management costs, to support the provision of discretionary services. Collier says Spelthorne’s current portfolio is contributing on average £10+m per annum.
If that level of contribution is maintained over the 50 years financing period, the result will be a net £0.5bn contribution to the council, as noted above.
Spelthorne also ensured that it invested in “best-in-class assets, with good quality tenants, adjacent to key transport infrastructure”.
The council’s investment assets portfolio consists of eight office buildings, comprising both single and multi-let buildings, located within the borough or the wider Heathrow economic area. Given its proximity to the borough’s boundary, Heathrow has a significant impact on Spelthorne’s economic prosperity. BP campus, described as the largest privately owned office park in the UK and located within the borough boundary, accounts for 40% of the portfolio.
Collier says the portfolio maintains a ‘best-in-class’ classification, which was verified during a December 2023 external review by real estate services company JLL. Tenants have strong covenant classifications and are generally large corporate occupiers, Collier explains, “which ensures our asset values are maximised and provides as much certainty of receiving rental income on time as is possible”. This is demonstrated by income received being “consistently in excess of 99%”.
He adds that the portfolio is “well diversified in terms of occupier sectors”, and the weighted average unexpired lease term of 8.32 years (as at March 2024) is ahead of the market benchmark for South East offices of 7.3 years.
Collier also notes that the council “always sought legal QCs advice on our powers to make acquisitions before proceeding” and ensured “no interest rate risk by fixing all interest rates on all the loans for their duration”. As noted, the average rate of interest fixed for the investment assets is 2.33%.
“There is no need to refinance any of this debt, so no exposure to interest rate rises over the next 50 years,” Collier says.
Spelthorne also modelled the income streams over 50 years and focused on “mitigating risk of lease breaks being operated or leases not being renewed by building up sinking fund earmarked reserves by setting aside some of the rental income to create a safety net to cover short term dips in income”.
Collier says that, partly as a result of building up sinking funds reserves, Spelthorne at the end of 2022/23, on the basis of LG Improve independent benchmarking, had the highest ratio of revenue reserves to net expenditure of any district or borough council in England.
Spelthorne’s total cash backed reserves, after excluding developer contributions, was £66m as at 31 March 2024, a net rise of £3m. The council’s total sinking funds earmarked reserves balance stood at £35m at that time.
Finally, Collier says that the council has always made Minimum Revenue Provision (MRP) on all the investment assets: “aligning the MRP annual payments with the debt repayments so as MRP is set aside it is applied to pay off the debt. Having had our MRP set asides independently reviewed it has been confirmed that we have overprovided by nearly £3m – so we have accelerated our rate of repayment.”
While it remains to be seen how the Best Value Inspection plays out, Spelthorne has pledged full cooperation, while highlighting the results of the local election that took place after the CIPFA review where 22 new (out of 39) councillors were elected, bringing “a new way of working”.
For Collier, the “biggest risk” now for Spelthorne would be to “divert from” the investment approach that has been outlined. “Proactively engaging with our tenants, listening to and responding to their needs, building relationships and ensuring our buildings maintain the best-in-class status is considered a key driver in our successful asset management approach,” he says.
Borrowing limits
Spelthorne Borough Council recently agreed to a one-off extension to its borrowing limits, in a move which might have caused some alarm bells to ring.
Room151 asked the council to clarify why was this needed and how the council will ensure the limit will not be breached again.
Collier said there were two reasons for the one-off adjustment. First, since the capital programme for 2024/25 was set in February 2024, the council has successfully bid for an additional £10m grant contribution from the Local Authority Housing Fund capital grant from the Department for Levelling Up, Housing and Communities [now the Ministry of Housing, Communities and Local Government] in order to acquire 50 temporary accommodation units.
“The grant will equate to approximately 49% of the purchase cost, which means the council needs to borrow the balance of the cost equating to approximately £14m,” Collier says. “In the midst of the housing crisis, the council is facing a rising need for temporary accommodation which is increasing significantly in cost. The acquisition of these 50 units will ease pressures on the council’s revenue budget by more than £1.2m per annum, which significantly outweighs the additional borrowing cost for these units.”
The second reason is that, in liaison with external advisors, the council had been weighing up various options for completing the financing of its new leisure centre, which included liquidating its current investment portfolio to generate £35m of cash funding to reduce the need to borrow.
“However, the anticipated interest rate movements did not occur during the last quarter of the financial year and looked increasingly unlikely to materialise in the first quarter of 2024/25,” Collier explains. “The upside to this was that the treasury management team were yielding an extra £1m per annum in interest received and therefore it was decided to defer the funding of the leisure centre until September this year, when a funding decision would be required.”
In order to provide additional borrowing limit headroom in the event that it decided to finance by borrowing, Spelthorne increased the borrowing limits.
“Following the announcement of the general election and recent CPI figures, it appears that the right decision was made,” Collier says. “So, it is likely that much of the additional borrowing limit will not be required. Following the deferral of the funding of the final element of the leisure centre, the council is now looking to finance that by drawing down its medium-term pooled investment funds rather than finance by borrowing. So, it is likely that not all of the additional headroom created will be required.”
From 2025/26, Spelthorne’s capital programme will drop to approximately £3m per annum and from then onward the council’s total outstanding debt will steadily fall each year, Collier states.
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