By Spelthorne Borough Council
A number of articles have been written in recent weeks about Spelthorne Borough Council’s investment strategy which the Council considers requires some correction.
Like all councils, Spelthorne Borough Council has faced increasing financial pressures as a result of the withdrawal of Government grants and in 2016 the Council found itself facing an annual budget gap of £5m. That year, following agreement from Cabinet and Full Council, Spelthorne 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 grown and the Council now owns 11 commercial properties in and around the Borough. These properties are rented on long-term leases to financially strong blue chip tenants.
The Council anticipates that this year these investments will generate a net return of £9.8 million. This extra income enabled the Council to respond well to the Covid-19 crisis for example. It has also allowed the Council to limit 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 asset portfolios, Spelthorne’s rental performance has done exceptionally well in the face of Covid-19. The Council has received 91% of the rent due for the March to June rental period, and of the balance all but 1% is covered by rent deferral agreements (where we still receive the rent but allow the tenant to pay a bit later). The Council has also secured an additional rental income stream of £3.67m per annum in the last 12 months alone through letting activity and pro-active property management.
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 planned for worst case scenarios and looks at what would happen if the properties are not fully occupied for a period of
time and we need to offer financial incentives to attract new tenants. These costs, plus the need to regularly refurbish the properties, is taken into account in determining how much of the rental income the Council needs to set aside each year as ‘rainy day’ funds (known as sinking funds). Since the Covid-19 pandemic, we have updated our projections for the next 10 years and are confident that we have sufficient of these sinking funds to protect us.
References have also been made to ‘unprecedented spending on office and retail’ but in fact less than 4% of the Council’s 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 the desire to regenerate the town and protect its long-term future, not for investment purposes. Most importantly, it will also deliver new housing, including much needed affordable housing.
The Council has always been completely open and transparent about these investments and has published its investment strategy on its website together with a list of the investments made and ‘frequently asked questions’ which explain the Council’s approach. 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’s inquiry on local authority commercial property investments in England.
It is nearly two years since the Council purchased a commercial property to generate income. Our focus now is on soundly managing our portfolio to minimise risk and maintain income, 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 plan 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.
June 22nd 2020