How can the Council invest in properties? I thought councils were short of cash. 

Yes, councils are short of cash as government funding has been removed in recent years. The Council started its investment policy to make up this shortfall and avoid cutting services.

We are taking advantage of low cost government finance in order to buy investment assets which will generate an income stream. The income generated is more than the financing costs and we are using this surplus to maintain Council services and build housing. 

Is the Council risking council taxpayer cash on commercial properties? 

No. The Council is not risking council taxpayers' cash to buy commercial properties; the low cost government funding for this strategy comes from the financial markets. 

Why is the Council investing in areas outside Spelthorne? Shouldn't we be putting money into our own area? 

There are limited opportunities to purchase assets in Spelthorne which meet our "best-in-class" criteria. Where we have invested beyond our boundaries, we have only done so in the Heathrow Economic Area to purchase those best-in-class assets which will provide a profit. 

The Council is putting money into its own area. We have a range of projects planned and underway which will be and regenerating Staines-upon-Thames town centre.

Doesn't the government have guidelines in place to stop councils doing this? 

The government has guidance on council borrowing - the Council abides by this at all times and we have taken legal advice to ensure that we stay within the law. 

Why can't the money for investment properties be used instead for services to residents?

Councils are not allowed to borrow to directly fund services. Indirectly, we can borrow money which when invested yields a surplus which goes into protecting services and building houses. 

Why can't the money be used to build council houses? 

The money is being used to provide more housing, with a number of schemes under development. We are buying sites within the Borough for housing as well as investment assets which will give us the income to be able to develop these sites and cover some of the upfront costs of planning, procurement and construction. 

Why can't the money be used to repair potholes?

Spelthorne Borough Council is not responsible for highways; that is the job of Surrey County Council. 

What sort of assets is the Council buying?

The Council strategy is to buy best-in-class investments in sought-after locations with excellent transport links and blue chip tenants. 

Why does the Council have £1bn of debt if its annual budget is around £22m? 

The Council has this amount of debt because it has purchased assets of equivalent value. We will be steadily paying off that debt over the loan periods. The assets generate an income stream which goes into the annual budget. The net income stream (after allowing for things like interest payments and management costs) is nearly £10m. If we did not have this income we would be forced to cut half of the Council's services and put up charges to make up the difference. 

Can the Council afford the repayments? 

Yes. Each acquisition is affordable in its own right. We make allowance for things like interest repayments, loan repayments, management costs and sinking funds for longer-term refurbishments before we take any surplus into the Council spending plans. We are very prudent in our approach. 

What will happen if the property market crashes?

If the values of the properties decrease then the Council will still have a number of tenants in situ who will be paying rent (for example BP paying rent until 2036). We aim to have tenants signed up on leases for around 10 years. We are investing on a long-term basis and we fully expect to hold these assets through a number of economic cycles. We have made allowances for costs such as refurbishment and void periods when there are no tenants, and we are building up sinking funds to ensure the money is there when we need it. We currently have £11m set aside and by April 2023 this will rise to £35m.

What's a 'sinking fund' and how big is it?

A sinking fund is a sum of money set aside to cover for foreseeable future costs and unforeseen events. For example:

  • when tenants move out and we have a void period before the next tenant moves in
  • when we need to refurbish a building

This is how the sinking fund will grow over the next five years:

Sinking fund

Councils shouldn't be playing the property market. Do you know what you are doing? 

Local authorities have a long track record of investing in property in order to regenerate their areas and provide housing and income. Other local authorities have assets far in excess of Spelthorne. 

Although this is a relatively new strategy for Spelthorne, we have recruited expert staff into the Council from the private sector and we also use top City firms of surveyors and solicitors to advise us. 

Isn't this like the Icelandic banking scandal? Is there a risk that taxpayers will have to foot the bill if it all goes wrong? 

Spelthorne Council did not have any funds invested in Icelandic banks. 

The banking scandal arose when local authorities risked their money in banks with unusually high interest rates and did not do enough upfront research. When the financial crisis hit, lots of them lost money. 

There are no parallels to this strategy:

  • we are investing in best-in-class assets which are attractive to investors generally
  • we do not invest in assets which offer unusually high rates of return as this is a sign of underlying risk. We only bid on a very prudent basis. We adopt the same approach as a prudent pension fund would take
  • we undertake thorough research and use specialist experts and consultants to understand and manage the risk of purchasing and running these properties
  • we own the assets, which can be freely traded at a later stage if needs be

Could the Council go bankrupt if these investments go bad? 

No, the Council cannot go bankrupt. We manage our risks by having a diverse portfolio of assets and a mix of tenants from different sectors of the economy. 

Portfolio diversification

What happens if property values collapse after Brexit?

What happens if tenants go bust after Brexit?

What happens if rental values collapse after Brexit?

What happens if post-Brexit the Council needs to get its money back in a hurry?

Clearly there is a great deal of uncertainty surrounding Brexit, and the Council has no better insight than any other commentator on what may happen in the next few years.

We are investing on a long-term basis and we fully expect to hold these assets through a number of economic cycles. We have made allowances for things such as refurbishment costs and void periods and we are building up sinking funds to ensure the money is there when we need it. We currently have £11m set aside and by April 2023 this will rise to £35m.

If offices become empty as a result of tenants going bust, the Council has funds set aside to cover this until the offices are leased again to new tenants.

Similarly, if rental values decrease we have funds set aside to cover the shortfall. As we say above, we are investing for the long term and expect to see peaks and troughs in the economy. 

The reason for having substantial sinking funds is to avoid the position where we have to consider sales of property which we are holding for the long term. If Council strategy changes, we have good options because we have invested in the highest quality of asset which we believe to be the safest and best approach as we will always have attractive, saleable assets. We will look to ensure that we protect the long-term underlying value of the portfolio as a whole. 

Why is the Council paying out such big sums of money to consultants and lawyers?

We believe it is a false economy to seek advice based purely on cost. We want residents to be assured that we have chosen the best people to do the job of looking after their interests, and this costs money.  We always seek to get best value from all of our partners. 

How much money is the Council making? Where is it going? 

The Council is receiving around £50m a year in rental income. After deductions, we are able to spend around £10m of this on services for residents and new homes for residents. 

The remainder of the money goes into paying interest, paying off loans, making provision for the management costs of the buildings and contributing to our sinking fund for the future. 

How much have we spent and how much are those assets now worth? 

Since 2016, we have invested £914m in commercial assets. We will have the assets valued on an annual basis. We have no current plans to sell any of the assets but this revaluation is for good estate management purposes. 

All these figures are publicly available in our accounts. In addition we have also published details of our assets in our residents' magazine, the Bulletin. We will continue to inform residents of these details because we want to encourage questions and transparency. 

How do you know you haven't paid too much for these assets? 

We receive independent advice from more than one source before we proceed. 

Shouldn't the Council have a balanced portfolio of investments, not just property? 

Property investment is just one aspect of the way in which the Council invests. 

The Council invests surplus cash funds in other pooled investments such as banks, bonds and other financial funds. Our track record is that we can usually earn an average 4-5% on these investments. 

We will be investing our sinking funds in a similar way to make sure that these funds increase in value. 

We are not allowed to borrow with the sole purpose of putting money into these types of investments. 

Are councillors qualified to manage commercial property investments? Shouldn't this be left to the professionals?

Councillors represent the voice of the resident and are there to challenge the advice and recommendations of officers and experts. They bring a common sense approach to the scrutiny of our investment strategy.

Councillors need the advice of experts and professionals to help them decide what to do for the best, but if they are not happy with the advice they are hearing, they can stop the investments proceeding.

Councillors have set out some investment guidelines (Cabinet agenda, item 7) that govern the decisions officers can make - you can read them here. These represent the approach which councillors believe is acceptable to residents. Councillors have discussed these parameters and this strategy with residents associations, and they have been happy with our approach. 

How are councillors accountable for their decisions?

Councillors are directly accountable to their electors. If you have concerns about what the Council is doing, you can contact your councillor

The Cabinet makes decisions about property investments within the financial parameters set by the whole Council. Cabinet is responsible to the Overview and Scrutiny Committee and the Audit Committee. These meetings take place in public and residents can attend these meetings and get copies of reports from our website.

The Council decides how much it wants to invest in property. Members of the public can attend Council and ask questions about any aspect of the investment strategy. 

As an example the Council's Capital Strategy will be decided by the whole Council in February 2019 and information will be available on our website in advance. 

Ultimately, if enough residents decide they want a different strategy they can make their views known at the ballot box. 

Why has SBC got hundreds of loans?

The Council does not take one loan per asset. Based on expert financial advice, we look for the best way to get the lowest loans over the life of the asset. All these loans are at a fixed rate. By using this approach on the BP deal, for example, we saved £14m interest over the life of the loan. There are no extra administrative costs from this approach.

Has SBC got expertise to manage a £1bn property portfolio?

Yes. Since 2016 we have recruited additional expert staff into the Council from the private sector with experience of managing investment portfolios.

We use expert property managers for the different buildings.

We rely on a range of external consultants to supplement our capacity on a project-by-project basis. 

Is BP your biggest tenant?

Yes. In 2016, income from BP represented 97 percent of the income from commercial property.

Following portfolio diversification in 2018 and the addition of new buildings and tenants, BP now represents 40 percent of our income. 

Does SBC have an acquisition strategy?

Yes. These investment parameters have been agreed by councillors in consultation with residents.  These investment parameters were agreed in December 2017 (Cabinet agenda, item 7). 

We will be publishing a Capital Strategy in February 2019 which will provide more detail about our approach. 

Is there any sector SBC doesn't invest in?

We have one long-standing retail investment in Staines-upon-Thames town centre (Elmsleigh Centre), but our investment parameters do not envisage us investing in further retail inside or outside the Borough. 

So far we have not invested in industrial and warehousing, but we may consider this as an investment class if the right opportunity becomes available. 

Are you planning more acquisitions?

Yes. We need to fund development of affordable housing in the Borough and we will outline in our Capital Strategy (to be published Feb 2019) how, where, when and why we may consider further investments. 

Are any properties held offshore?

No. This is not part of our investment parameters. 

Is there a map that shows where the acquisitions are located?

Yes.

Location and our focus

Have the properties been bought outright?

Yes. All are owned on a freehold or long leasehold basis (eg 999 years). 

Who advises the Council on acquisitions?

Our advice comes from teams within the Council and from external specialists:

  • Cushman and Wakefield
  • Deloittes
  • Savills
  • Clyde and Co
  • Landid

What housing developments are being supported through acquisitions?

The income from our commercial property investments is helping us to fund our which aims to meet the pressing need for new affordable homes in the Borough.

Are all acquisitions openly reported?

We take reports through our Cabinet for each acquisition. Some of the detail is confidential before we conclude a deal because of commercial sensitivity, but we are committed to being as transparent as possible about all of our investment portfolio and development projects. 

Where do you borrow the money for the investments?

We borrow short term from other local authorities and long term from the Public Works Loan Board (a government agency (effectively part of the Bank of England - which provides development finance to local authorities). 

What if interest rates rise?

All the loans we take out are on a fixed rate basis ie the rates we pay will not change over the duration of the loan. This allows us to model cash flow with some certainty and consider different scenarios over the life of the assets. 

If interest rates rise in the future, it may have an impact on whether we can afford to borrow on the same basis to acquire further assets. 

Why have SBC invested in one sector - offices - in one region rather than looking to diversify across broader sectors and locations in order to spread risk?

The Council has diversified its investments and tenants. We may in future consider changing our investment parameters to look at other regions if economic circumstances alter. The Council has deliberately avoided investing in retail, especially out-of-borough, because of the higher risks associated with that sector. We are looking for appropriate opportunities to invest in the industrials sector.

For the time being our preference remains tightly centred on the Heathrow economic area. 

How will this affect my Council Tax and Business Rates? Am I going to pay more for the Council's debt?

On Business Rates, this is set nationally by Government and we have no discretion on what we charge.

On Council Tax, the vast majority of this goes to Surrey County Council. Spelthorne residents pay only 11 percent of their bill towards Spelthorne Council services. 

The money from the Council's investment strategy supplements what we can receive from Council Tax and it protects services for our residents which might otherwise be cut. If we generated no investment income we would not be able to consider, for example, building affordable housing for the future. 

If we did not have income from investments then the Council could keep the Council Tax at the same level but drastically reduce its service levels. The alternative would be to ask residents in a referendum if they would agree to pay a hugely increased rate of Council Tax to avoid cuts. In either scenario, provision of affordable housing would not be possible. 

How many properties has the Council purchased?

View our full list of investment acquisitions

What impact have the investments had on the Council's finances? 

Spelthorne Borough Council has published its draft Statement of Accounts for 2018/19.

Unlike many councils, Spelthorne was again able to deliver a balanced budget whilst protecting services provided to residents from the effects of Government funding cuts, thanks to its policy of investing in commercial property which generated an additional net income of £7.7m in 2018/19 (after taking account of financing costs, supervision costs and sinking fund contributions).

The rental income from commercial properties enabled Spelthorne to start its ambitious programme of house building which aims to deliver more than 600 new homes in the next five years. It is also protecting a number of existing services including Community Centres, Meals on Wheels and Community Alarms.

During the year the Council entered into external long term borrowing of £389m to finance asset purchases with a balance of debt outstanding of £1,053m as at 31 March 2019. Of this approximately £40m relates to housing delivery and regeneration expenditure. The borrowing resulted in a financing charge of interest and principal repayments of £28.2m being charged (which was comfortably covered by income from the assets).

In the Statement it can also be seen that the Council added £6m to its cash backed reserves, with most of this relating to £5.8m which was added to the sinking funds for the Council's commercial assets, in line with projections. The Council has prudently ensured that these sinking funds[1] now stand at £11m and will be built-up each year to provide funds to cover the potential cost of refurbishment at the end of leases and void/rent free periods.

The Council achieved a £2.4m underspend for 2018/19 before financing transactions and chose to use £0.5m of this underspend to make an additional voluntary contribution towards debt repayments.

The underlying value of the Council's commercial assets increased in value, as measured by the independent valuations undertaken at the end of the financial year. Five of the assets in the portfolio increased, with the BP campus now worth £4m more than its original valuation. This increase reflects the anticipated uplift in rental income expected in 2021. There are no break clauses in the BP lease which has five yearly uplifts until the 20 year lease ends.

Thameside House in Staines-upon-Thames which was bought in 2018 for regeneration purposes also increased by £4m. Three commercial assets decreased in balance sheet value by a combined total of £1.288m but given the long-term nature of these investments, the Council is not concerned by this reduction.

It will be noted from the Accounts that there were net reductions in asset fair values of £8.4m which mainly relates to Stamp Duty paid on acquisitions during the year being written out. The Council had total Investment Assets valued (after fair value adjustments) at £984.5m as at 31 March 2019.

The Council used professional external advisers, appropriately procured, to help it assemble its portfolio of commercial investments and also recruited its own team with extensive commercial experience and expertise. In 2018/19 we spent £2.8m on property and legal advisers [2]. In the context of adding £349m to the Council's Balance sheet for commercial assets, and increasing net commercial asset incomes to £50m (£21m in 17/18 to £39m in 2018/19), equates to a percentage of approx. 0.7% of the total value added.

Cllr Ian Harvey, Leader of the Council, said: "Our Draft Statement of Accounts shows that our strategy of investing in commercial property is already proving very successful. Unlike many other councils, we have delivered a balanced budget and are improving services for residents, rather than making cuts. All our investments are backed by solid due diligence checks and residents can be assured that we do not take unnecessary risks. I am pleased that the results speak for themselves and that our solid finances are allowing us to build new homes for local residents."

To view the Draft Statement of Accounts, visit https://www.spelthorne.gov.uk/media/20553/Draft-Statement-of-Accounts-2018-19/pdf/Draft_Statement_of_Accounts_2018-192.pdf?m=636951746361170000

Notes:

1) As part of due diligence the Council undertakes when considering an acquisition, models over the duration of the required borrowing, usually 50 years, the anticipated need to incur capital refurbishment of the asset when leases end and estimates future potential void and rent periods. The Council will only acquire assets where there is sufficient margin in rental income over financing costs to enable a sinking fund to be built up annually which will be sufficient to offset these future costs and thereby protect future council taxpayers from additional calls on the Council's main revenue budget.

2) Our lead advisers in 2018/19 were:

Cushman and Wakefield - property and valuation

£1,991,257

Clyde and Co- legal

£   640,787

Deloitte- financial assessment of tenants, guarantors and second opinion on methodology

 

£   127,800

Arlingclose Treasury Management

£     26,814

   

Total

 

£2,786,658