Gravesham Borough Council

Transcription

1 Classification: Public Key Decision: N/A Gravesham Borough Council Report to: Cabinet Date: 1 February 2016 Reporting officer: Subject: Chief Executive Director (Corporate Services) Property Acquisition Strategy Purpose and summary of report: To approve the Property Acquisition Strategy. Recommendations: That Cabinet recommends to Full Council; That the property acquisition strategy be approved. That powers to acquire or dispose of properties purchased as part of this strategy be delegated to Leader of the Executive. Support to be provided by a cross-party working group, the Chief Executive, Director (Corporate Services) and Assistant Director (Governance & Law). That a fund of 10 million of investment balances be made available for such purchases. That an addition of 10 million be made to the current years capital programme. 1. Background 1.1 Over the last few years there has been increasing pressure applied to the public sector to strategically manage and operate property assets. This burden is only going to increase with the phasing out of the Government grant over the coming years and as such the need to find alternative income streams is only going to increase. 1.2 The new Corporate Plan also recognises the need for alternative income streams in the new theme Sound and self-sufficient council: a well-run and innovative council supporting its staff to realise commercial opportunities whilst transforming its services to deliver at the best possible value for money. 1.3 With this in mind consideration has been given to purchasing property solely in order to obtain an income stream.

2 1.4 Linked to this, a presentation was recently given to Management Team regarding the Property Investment Strategy which Sevenoaks District Council has adopted as a way of helping to mitigate the gap in funding caused by the continuing reductions in Council budgets. Subsequent investigations have revealed that similar approaches are being taken by a number of other Councils in the South- East (e.g. Eastleigh, Crawley, Guildford and Ashford). 2. Property Investments 2.1 As an asset class property investment provides a better total return (i.e. from both income and capital appreciation) than cash investments, whilst still maintaining a high level of security. 2.2 Investment in property is a long term investment. The money tied up cannot normally be accessed at short notice and therefore it is important that the cash used will not be required in the short or medium term. Criteria for selecting investment assets 2.3 Any properties acquired for investment purposes need to fit within agreed parameters as set out below, but elaborated upon throughout this report. The principal criteria being as follows: The investment provides a regular income with the net initial yield exceeding a minimum level of 6% (i.e. for each 1,000,000 of investment, the net income from that investment should be equal to or exceed 60,000 per annum), and after taking into account all costs associated with the acquisition That the purchases be from the retail, industrial and business (i.e. office premises) sectors That a maximum amount of 10 million be invested in such assets as longterm cash-flow modelling shows this cash to be available for the authority to use on a long-term basis Acquisitions are not limited to being within the Borough of Gravesham. Purchasing properties the process 2.4 The acquisition of any freehold or leasehold interest has to be made by way of legally binding contracts. It is usually necessary and good practice to carry out a range of searches / enquiries before entering into any form of binding contract. It is therefore proposed that acquisitions be conditional on the following points: The results of searches / enquiries (land registry, local and legal) being satisfactory. An independent surveyor s valuation of the property and detailed purchase report to support the purchase price. Satisfactory structural survey. 2

3 A justification report being prepared and agreed. The report to include an appraisal of the open market value, purchase costs and an estimate of any repair / refurbishment / void costs. Costs of purchase 2.5 As the purchase of property for investment purposes is a new venture for the Council and is not an area that the Property Services Department has experience or expertise in, it is considered prudent to retain a firm of Chartered Surveyors who specialise in this area to advise the Council. 2.6 As such any direct property acquisition would be subject to purchasers costs (based on the purchase price) which would normally include the follows: Stamp duty 4.0% Legal fees (plus VAT if applicable) 0.5% Agent, survey and valuation fees (plus VAT if applicable) 1.0% 5.5% 2.7 Certain vendors may opt to tax (i.e. impose VAT) on the sale price. This cost will be in addition to the purchase price but any VAT attributable to the purchase will, unless the Council s 5% partial exemption limit is exceeded, be recoverable. 2.8 Land registration fees are also payable to the Land Registry to register the completion of the acquisition on a prescribed scale based on the value of the property. 2.9 When a property is purchased at auction there may be also be a buyer s commission to be paid. 3. Risk Management 3.1 The ownership of properties for investment purposes is not without risk as follows: Property values (capital and rental) can go down as well as up albeit a fall in capital values only really becomes an issue for the Council if it wishes to dispose of an asset Vacancies due to a tenant going into liquidation / administration or alternatively not renewing its lease at expiry. Length of leases that tenants are willing to sign up to have shortened considerably in recent years. In the 1980s leases of 25 years were the norm; now tenants will generally commit to leases of 3-10 years. As such the frequency of times that a property is vacant has increased. In this event not only would the authority lose its income stream but would also be responsible for the outgoings of the property which could be significant e.g. business rates. In addition, should a tenant default during the term it is likely that the Council will have to clear and refurbish the premises prior to re-letting and in the meantime will need to keep the premises secured. These costs could be significant and a sinking fund will need to be established to cover them. 3

4 3.1.3 However, the above risks need to be balanced against the current returns being generated on the funds which will ultimately be used to make such acquisitions. With Bank of England interest rates at such historically low levels, typical returns are around 0.6% per annum at present, and have been for some time. Even with forecast increases to around 2% per annum over the medium term, the minimum criteria of a 6% per annum net return from property investments provides a significant buffer for such shocks, and means that ultimately any return achieved above 2% will make a positive contribution to the General Fund Medium Term Financial Plan budget shortfall. Further details on this are included within Section Five below. 4. Legal Considerations 4.1 The power to acquire land for purposes in connection with the Council s functions is contained sections 120 and 121 of the Local Government Act Whilst there is no general duty to purchase at best consideration the Council must be able to demonstrate that it has exercised those powers in a manner consistent with its fiduciary duty to the council tax payer i.e. that the purchase price paid is reasonable in light of the particular facts and circumstances. Investment purchases are allowed by virtue of s12 of the Local Government Act Sites and properties are normally acquired by private treaty (negotiation), auction, and by way of partnership working e.g. land swaps. Generally properties are marketed by way of private treaty and the terms and conditions are negotiable. The acquisition of any property is dependent upon the market and the willingness of the owner to put their assets on the market. Unless a vendor is a distressed seller then it may be difficult to persuade any particular vendor to sell. Therefore both a focussed and opportunistic approach needs to be adopted. 4.3 The acquisition of any freehold or leasehold interest in land has to be made by way of legally binding contracts. It is usually necessary and good practice to carry out a range of searches / enquiries (land registry, local and legal) before entering into any form of binding contracts. In addition arrangements will need to be put in place to ensure that all necessary checks and surveys are carried out before any irrevocable contractual commitment is entered into. With this in mind prior to a decision to purchase being made a justification report for the purchase should be prepared. The justification report shall comprise of an appraisal of the open market value, purchase costs and an estimate of any repair / refurbishment / void costs. 4.4 Properties that are acquired via auction will require all legal enquiries to be carried out before submitting a formal bid, as the contract becomes binding when the auctioneer s hammer comes down. Other contracts are binding when formally signed and exchanged with the vendor. Legal completion of the purchase is commonly 28 days after exchange of contracts but this could vary on a case by case basis. 5. Financial Considerations 5.1 There is no external funding available for such a scheme, nor does the authority have sufficient existing reserves / capital receipts. Therefore, officers have explored the various borrowing opportunities that are available. 4

5 5.2 The authority currently invests its surplus cash balances in accordance with the approved Treasury Management Strategy Statement. These deposits earn interest and the revenue generated contributes towards the authority s balanced budget. The authority s cash balances have increased over recent years due to changes in Government Policy such as HRA Self Financing and the Council s policy of bolstering its reserve position. Despite this the revenue return from investments remains relatively low due to the low Bank of England base rate. 5.3 Instead of investing the authority s surplus cash balances as detailed above, a proportion of these monies could be used to fund the acquisition of properties for investment purposes. This is effectively known as internal borrowing. The alternative would be to take on additional borrowing from the Public Works Loan Board, however this is currently more expensive as current rates suggest that a loan of 25 years would cost the authority around 3.38% in interest per annum and this would decrease the overall return achieved from the property investment. 5.4 The use of internal borrowing to expand the Council s property investment portfolio would not require a sum to be identified within the Medium Term Financial Plan (MTFP). Neither would the authority s Treasury Management Strategy Statement (TMSS) need to be amended as the decision to purchase investment properties will be a policy decision not an investment decision. This has been confirmed by the Capita Asset Services (Treasury Solutions), the authority s treasury management advisors. 5.5 As a result of such expenditure being classified as capital and the authority s cash surplus being utilised to effectively finance the transaction, there will be an increase in the authority s Capital Financing Requirement (CFR) in the year(s) in which the transactions are incurred and this will be managed through the annual Treasury Management Strategy updates to the Finance & Audit Committee. 5.6 There will also be an increase in the Minimum Revenue Provision (MRP) in subsequent financial years. MRP will be chargeable in line with the policy that is set out in the TMSS; that is a series of equal amounts chargeable over the estimated life of the asset. If the estimated life were to be set at 50 years, this would result in a 20,000 increase in MRP for every 1 million investment. 5.7 In accordance with the Council s Constitution, as this type of purchase will be classified as capital, an in year addition to the capital programme of 10 million will be required. The balance of any unspent funds at the end of the financial year will be slipped into future years. 5.8 All expenses directly attributable to any purchase, will in accordance with accounting regulations, be charges to the investment fund as part of the cost of acquisition, and will therefore be taken into account as part of the overall evaluation of the property acquisition. 5.9 Investment properties purchased through this strategy will need to be revalued on a regular basis in accordance with the Code of Practice on Local Authority Accounting. 5

6 6. Other considerations 6.1 Decision making process the research referred to in paragraph 1.4 highlighted the need for Councils to be able to respond quickly in the event of a suitable property coming to market. As such the current Standing Orders where the decision is delegated to the Leader of the Executive and is subject to call in from Overview Scrutiny would need to be amended for the purpose of purchasing investment properties as such the following is proposed as a way of taking such acquisitions forward; That all call-in provisions within the Constitution in relation to such acquisitions be waived, and as a means of providing a Scrutiny function, a cross-party working group be established, with three representatives of the controlling political group and two from the opposition group. Both the Leader of the Executive and Leader of the Opposition will sit on the group as part of the five Members. This group will be consulted on any proposal to purchase such property, and provide their view to the Leader of the Executive That delegated authority be provided by Full Council to the Leader of the Executive to make such acquisitions following consideration of the view reached by the cross-party Member group That both the cross party working group, and the Leader of the Executive be supported by the Chief Executive, Director (Corporate Services) and Assistant Director (Governance & Law) together with any other officers as necessary depending upon the nature of the acquisition in question. 6.2 Location where to purchase is another consideration. Generally Councils have bought within their boundaries however this isn t a blanket view. Some have chosen to purchase further afield either because of a lack of suitable opportunities within their boundaries or to avoid management issues e.g. tenants attempting to influence decisions (e.g. as to rent) by contacting press or local members. Whilst properties located within Gravesham that fit the Council s criteria may be preferred (particularly given the potential for growth due to Paramount and HS1) there is no reason why the Council should not consider properties that fall outside the borough. This is particularly pertinent if by investing outside the borough the risk is spread and exposure to areas of the commercial property market that are currently unrepresented within the current property investment portfolio and where there is limited scope to add to the portfolio locally (e.g. offices) is increased. Initial findings have suggested that opportunities to purchase suitable investment properties within the Borough will be few and far between and as such in order to purchase suitable properties the search will need to be widened. 6.3 Resources The purchasing of additional properties will require officer resources (finance, legal and property) related not only to the purchase but also to their ongoing management. It is not envisaged that the Council would purchase more than a small number of properties and as such it is anticipated that no additional resources will be required although if e.g. a significant number of properties were to be purchased, or properties were purchased further afield, this could change. 6

7 7. Disposal of Investment Properties 7.1 The decision to sell assets during the holding period may be triggered by a variety of factors and is not limited to lease events, market forces, portfolio mix or changes in strategy. The portfolio will be open to continued appraisal and active management with a view to minimising risk and increasing returns. 7.2 Should the need for any such disposal occur, it is proposed that the procedure set out at Section Six be followed in the same way as for initial acquisitions. 7.3 The capital receipt generated from any disposal can only be used to fund capital expenditure. 8. Governance Arrangements 8.1 As set out above, a cross-party Member panel will be established to form a view on the acquisition and any subsequent sale of investment properties purchased through this strategy. The panel will meet as necessary and will be formed of three members from the Administration (including the Leader of the Administration) and two members from the Opposition (including the Leader of the Opposition). The panel s view will be informed by advice from the Chief Executive, Director (Corporate Services) and the Monitoring Officer. 8.2 Any decisions made by the Leader of the Executive will be reported to the next meeting of the Cabinet for information purposes. 9. Background Papers 9.1 There are no background papers relating to this report. 7

8 IMPLICATIONS APPENDIX 1 Legal Finance and Value for Money Risk Assessment Attached within the body of the report. Attached within the body of the report Attached within the body of the report and in the attached policy. Equality Screening for Equality Impacts Impact Assessment Question Answer Explanation a. Does the decision being made or recommended through this paper have potential to cause adverse impact or discriminate against different groups in the community? b. Does the decision being made or recommended through this paper make a positive contribution to promoting equality? No No c. What steps are you taking to mitigate, reduce, avoid or minimise the impacts identified above? Not applicable In submitting this report, the Chief Officer doing so is confirming that they have given due regard to the equality impacts of the decision being considered, as noted in the table above Corporate Business Plan Crime and Disorder Links with Corporate Objective 4 Sound & self-sufficient council There are no crime and disorder implications arising from the recommendations contained in this report. 8