DRAFT V5. PFSC 16/05/2014 Appendix 1. Outline Plan to deliver the County Council s investment property Strategy

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1 PFSC 16/05/2014 Appendix 1 Outline Plan to deliver the County Council s investment property Strategy 1. Strategic Drivers 1.1 The County Council s property investment strategy sets out how its property team will manage investment in non-operational assets. It is consistent with broader corporate and medium term financial strategies. Its principal objectives are financial but it will also support broader Council objectives around economic growth, area regeneration, jobs and new housing where there are opportunities to do so. Its principal area of investment will be West Sussex. Council Finances 1.2 West Sussex County Council is facing a sustained reduction in revenue funding from central government of over 20% from 2012/13 to 2015/16, with indications the trajectory will continue to The Council faces savings of up to 141m in the four years to 2017/18. This sustained pressure on revenue means it is increasingly important for the County Council to find ways to generate income locally, so it has greater control over its own future finances and to protect vital local services. Property investment is a key means of achieving this aim. 1.3 The County Council has historically disposed of surplus assets to generate capital receipts and it maintains only a limited property investment portfolio (income 0.400m in 2012/13). Looking ahead, the Council is keen to expand the investment portfolio and generate additional annual income by developing surplus County Council sites and other acquired sites. Nevertheless, it must balance this objective with the need to generate capital receipts to support the Council s capital programme as set out in the medium-term financial strategy, which currently assumes disposals deliver receipts of 8m per annum (approx. 8% of the programme funding for the period ). It must also take into account the need to sustain capital funds to invest in property development ( 36 million currently set aside). Corporate and Community Priorities 1.4 The County Council considers there to be scope for its property investment strategy to support broader corporate and community objectives in West Sussex relating to economic growth, employment opportunities, housing provision and area regeneration. While these factors are not the primary strategic drivers for the property investment strategy, they will be taken account of each time the Council examines an opportunity for site development.

2 1.5 Economic Growth. Like all parts of the country, West Sussex is aiming to deliver robust and sustainable economic growth, which will improve its ability to retain the working-age population and attract more skilled working age people to the area. In turn this will help improve the demographic balance in the county to a higher ratio of working-age residents. Property investment can support economic growth by creating new employment floor space (eg building new light industrial units) and by increasing spend in the local supply chain. 1.6 Housing. Another key challenge in West Sussex is providing an appropriate mix of housing supply. The Coastal West Sussex Strategic Housing Market Assessment Update, which covers Chichester, Worthing, Arun and Adur highlights the importance of appropriate housing supply to attract and retain younger working age persons through the provision of affordable and intermediate housing options. By developing residential property, the Council can help to address a key shortage in the current market. 1.7 Area Regeneration. Figures for West Sussex mask significant variances across the county with areas of significantly lower average earnings/deprivation levels in some districts of the county. The property investment strategy can support area regeneration objectives, particularly if development in areas is not commercially attractive to private sector developers. 2. Property Investment Objectives and Performance Indicators 2.1 On the basis of the strategic drivers, the following objectives are expected to inform the property investment strategy: Figure 2: Key objectives and associated performance indicators Financial Objective Sustainable increase in Council revenue income Meet capital receipt requirement Delivering new housing Performance Indicator Profit Revenue income per annum Gross and net yield by site and asset type Additional business rate retention Additional New Homes Bonus Additional council tax receipts Annual capital receipt v target Return on capital investment Peak debt requirement New houses built New affordable homes built Wider Corporate and Community Objectives Supporting local economic growth Employment floor-space sqm created per annum No. of jobs this space will sustain Additional spending in local construction supply chain and job sustainment Area regeneration Impact on GVA Unemployment Investment by area

3 2.2 At this stage each project business case would be expected to show a Capital Return on Cost (capital spend plus land plus finance costs) at a minimum of 20% per project, and /or an Income Return on Cost (gross rents less management fees as a percentage of gross cost) of at least 4% per annum. Forecast cash flow summaries and KPI summaries are provided in Para 10 to this Report. Whilst an industry standard return would be in the region of 20%, the primary aim of PropCo is for socio economic benefit as well as commercial rates of return from development. As such it would be unrealistic to expect PropCo developments to match this on all of its investments. It is therefore recommended that the minimum expected return from each development would initially be discounted down from 20% because of the non-financial considerations that may be required or taken into account, such as job creation and stimulating the local economy. 2.3 The benefits which the property investment strategy will deliver have not yet been factored into the corporate or medium-term finance strategy, but it is important going forward for the Council to establish the likely benefits and track the outcomes it expects to deliver from its investment. Understanding the potential benefit of developing individual sites will form a key element of the site options appraisal process as well as helping to inform the relative prioritisation of development opportunities. This in turn will enable the Council to quantify the net impact of its strategy. 3. The County Council s Management Approach to Property Investment 3.1 There are a number of ways in which West Sussex County Council could deliver its investment strategy whether in-house, via a property vehicle company or arms-length investment in a property fund. The Council has chosen to proceed by directly managing its investment activity because: It is keen to maintain transparency over its use of funds for investment It wishes to be able to prioritise development activity which supports corporate and community objectives and may therefore necessitate compromise on the commercial return 4. Ongoing Steps 4.1 Structuring the Pipeline. The Council has identified key sites with potential for development. To establish the structured delivery pipeline of projects, preparatory appraisal, legal and planning work is or has been carried out for each priority site.

4 These are key stages in understanding the development potential of each site, and the likely costs and other constraints, as well as the likely timescales involved in the delivery of the benefits. Assessing site potential enables the Panel to understand which sites offer the best return and also help the County Council understand the aggregate benefit the pipeline of sites will deliver. This will be an ongoing process with the pipeline kept under review to take account of emerging issues. 4.2 High-level market assessments inform the prioritisation of the assets and the indicative financial returns which could potentially be realised over a defined timeframe (see paragraph 8.1 below). Figure 3: Identifying High Priority Projects 4.3 Funding Requirement. The County Council has 36m within its capital programme and medium term financial strategy to support the development of sites and to acquire new investments, as may be identified. High-level financial modelling of cash-flows and reviews of the peak debt requirement continue. The Plan acknowledges that the Council may need to re-prioritise investment, select alternative site development options or consider ways to mitigate the financial impact. PropCo will pursue a twin-track approach of developing sites for revenue generation while also generating capital receipts to sustain the capital investment fund for property investment, and/or to meet planning assumptions for wider capital receipts supporting the County Council s medium term financial strategy. 4.4 Programme and Project Resourcing. West Sussex County Council s property team is small and seeks to manage the competing demands of the operational portfolio, its collaborative work with partners as well as Propco activity. Taking into account the project delivery pipeline, the Panel is undertaking a programme resourcing review to ensure that the

5 required skills and capacity are identified and a plan for delivering them is put in place. Issues which it is considering include: ensuring the appropriate span of development expertise (eg residential); establishing a programme management co-ordination team; sales capability and resourcing the downstream landlord and tenant capacity of an expanded investment portfolio; establish whether it is value for money to recruit the required skills in-house or contract for delivery from external parties; ensuring there is clarity around roles, responsibilities and accountability for the performance of the property investment programme. 4.5 Performance Reporting. Figure 2 sets out the proposed high-level performance indicators for the programme and individual projects. There is also a requirement for financial and contract management tracking by project including time, cost and performance measures. It is proposed that a performance dashboard be developed with common reporting criteria at programme and project level to enable an understanding of project-specific and aggregate performance. This will aim to set out the expected benefits profile, establish target performance and provide status reporting on a rolling basis. This will enable the Panel to focus its attention on key programme and project issues. 5. Clarifying Governance Arrangements 5.1 It has been important to clarify the governance arrangements for delivery of the property investment strategy, and establish clear ways of working to support Panel s terms of reference. The Panel will: be responsible for overseeing the delivery of the investment portfolio objectives and will be asked to review annually the overarching investment strategy and provide guidance on commercial property policy; monitor progress against performance indicators and ensure corrective action is identified and progressed where required; agree new projects to be added to the development pipeline; maintain oversight of programme funding, cash-flow, and project resourcing and provide guidance on programme priorities;

6 approve project-specific recommendations on options appraisals and business cases at three key stages as set out at Annex A: o o o High-level asset development review to determine preferred course of action Detailed option appraisal and outline business case Full business case including procurement of delivery partner 6. Other Factors to be addressed Commercial Options for Procurement of Development Support 6.1 In order to develop sites, West Sussex County Council is likely to require significant development and construction support, as well as market research, legal and financial advice. Further work is being undertaken to appraise the benefits of different procurement approaches including: a. Frameworks. West Sussex County Council can contract for development, construction and consultancy support from a number of frameworks, although residential development is currently assessed to be an area of weakness in the current framework coverage available (given existing are more for public building works.) Access to a national framework of house builders supported by the Homes and Community Agency has now been sourced and available- pending any further decisions to procure a new local framework. b. Ad-hoc Joint Venture. Such an approach would see West Sussex County Council delivery support on a project by project basis with the sharing of risk and benefit determined on the basis of the individual project conditions. c. A strategic development partner. West Sussex County Council could opt to compete a multiple-site strategic development/construction role through OJEU, which would see a single contractor or consortia selected to lead all development and construction work. The advantages include establishing a long-term partnering approach and potential supply chain efficiency, but may inhibit market competition on a project by project basis. 6.2 As the proposed programme of projects becomes clearer, the Panel will continue to assess whether it needs to strengthen its procurement options (eg. set up a framework for residential developers) and whether there are any benefits to procuring support across more than one project.

7 7. Market Analysis 7.1 Market analysis continues to be commissioned at a local level for each project and serves to inform decision-making by indicating which asset types are likely to prove realistic and deliverable from a market perspective. The market analysis provides an indication of the levels of demand, values, rents, yields within the local market, in addition to market trends and sentiments which are critical to understanding the prevailing and anticipated market conditions. Such information will also inform decisions on whether to retain assets for revenue income or dispose for capital receipt. 7.2 Market analysis also enables the Panel to ascertain whether the returns being delivered are consistent with wider benchmarks in the property investment sector. It will also need to understand prevailing and anticipated trends in the market as it considers where it might wish to procure additional assets and of what type. This information will then be aligned with local market intelligence about upcoming opportunities for investment. 8. Risk, Interdependencies and Constraints 8.1 Programme and individual project-level risks will be identified and managed throughout development. Risk Registers will be prepared at programme and project level, monitored and regularly updated. Each identified risk will be assessed in terms of level of risk, likelihood of occurrence and mitigation strategy. The Risk Register will be a live document and risks closed as mitigation action is completed. 8.2 Risks may include but are not limited to flexibility of procurement, Right to Buy, S106 Agreements, financial, political, reputational, environmental, legal, and capacity to deliver. Other constraints such as highways infrastructure and flood risk may emerge on a site by site basis. 8.3 In addition there will be a number of interdependencies which will also need to be considered e.g. the availability of new surplus assets to develop. Furthermore, market conditions may change over time and the success of the programme is heavily dependent upon the economic and property market outlook which will impact upon market demand, capital values, rents and yields. 9. Communications, Branding and Marketing Strategy 9.1 A Communications, Branding and Marketing Strategy still needs to be developed and will be informed by best working practices in marketing and communication. The plan will be developed to identify the range of services required (e.g. letting/sales agents, public relations consultants, brand consultants or legal advisors)

8 With the limited size of the current team, it will be important to establish what additional resources may be required. The Strategy will also cover such areas as marketing initiatives and launch events and branding. 10. Proposed Indicators based on current cashflow forecasts Peak debt 22,885,000 Gross Rental Income by 31 st March ,000 Return on Cost (Return on Capital Investment plus land and finance) Net rental yield Target minimum 20% per project 4% (Gross rents less fees, as a percentage of gross cost) PropCo Cashflow April st March st March st March st March s 000s 000s 000s Net Reserve Position * 2, ,594 Capital Expenditure 4,377 9,966 18,184 24,479 Receipt/Dividend Net Cash Position 6,526 10,378 18,005 22,885 Gross Rental Income** *Net Reserve position is what will have been financed through revenue reserves by year end 2014/15. **Gross Rental Income and Net Cash position currently assumes a 70/30 split of sales to rental on the Barnham scheme rather than 100% rental at this stage

9 Annex A Programme Action Plan to Underpin the Property Investment Strategy Programme Level Action Plan Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Programme Governance Propco Panel Meeting Performance and Highlight Reporting to Propco Phase 1 Identify and agree key objectives and performance indicators for the property investment strategy Establish programme action plan to set Propco up for success Clarify governance arrangements to support effective working of the Propco Panel Approval of phase 1 deliverables at Propco Panel Phase 2 Development Prioritisation High level market assessment to inform indicative returns Site asset review to understand high level potential financial/non-financial benefits, potential investment needed, constraints Structure project delivery programme taking account of ease v benefits against key objectives Establish forecast aggregate benefit profile Financial Profiling Model structured programme to establish forecast cash flow and peak debt requirement Establish viable funding model and options around investment and returns (eg revenue v capital) Produce high-level cost benefit analysis Programme and Project Resources Identify required skills and capability Options to meet requirements Clarify roles, responsibilities and accountabilities Performance Reporting Establish programme and project level benefit tracking Establish programme and project level performance tracking (cost, time etc) Set up performance monitoring dashboard Approval of phase 2 deliverables at Propco Panel Phase 3 Procurement SWOT analysis of procurement routes available Identify any actions required to improve procurement options (eg frameworks) Prepare advice to Propco on procurement delivery models Market Analysis Establish understanding of best practice market benchmarks Set up market opportunity monitoring to support identification and acquisition of future assets Risk Management Establish programme-level risk register Establish project-level risk registers Marketing and Communications Strategy Identify requirements Identify options for meeting the requirements Approval of phase 3 deliverables at Propco Panel

10 Annex B Project Approval Points B1. This annex covers proposals to establish clear approval points for the development of individual property sites in accordance with commercial best practice and standard Green Book methodology. Getting the analysis right at the outset is important for project success and the proposed approach is common to both private and public sector development management. B2. The three step process set out in this annex will allow the Panel to take a structured approach to considering site development options, and it will be asked to agree recommendations at each stage. The Panel will be routinely kept abreast of salient projects issues through monthly performance reporting and highlight reports, but it is important that a clear and formal process is applied to option selection and investment decisions by site. B3. The options appraisal process is key to ensuring that viable options are not discounted prematurely and that nugatory work is avoided on options which are unlikely to deliver best value for money. It should also ensure that the Council has a good understanding of the likely value, benefits and risks associated with a scheme before procurement is undertaken. The procurement stage is designed to ensure the Council selects the best supplier to meet its time, cost and performance expectations and that a clear understanding of the sharing of risk is understood before a contract is signed and project delivery begins. B4. The first stage of consultation is proposed to occur following a highlevel options analysis of the site. At this point, Propco will be advised on: the potential options for the site which are commercially viable and which should be discounted an indication of high-level benefits and costs of the options an indication of which option is likely to be the preferred way ahead and tested at the next stage

11 B5. On the basis of this advice, the Panel it will be asked to agree the scope for the next phase of the options appraisal. B6. The second formal stage of consultation comes after the completion of the detailed options appraisal. At this point, Propco will be advised on: Confirmation the preferred way ahead will deliver the optimum return against the Council s financial and non-financial objectives Market analysis relating to the site The precise scheme for use of the site The likely time and cost parameters of delivery Key risks and constraints The proposed procurement route to select a delivery partner B7. On the basis of this advice, the Panel will be asked to agree the proposal to seek a delivery partner to implement the recommended scheme. B8. The third formal stage of consultation comes after the completion of the procurement process. At this point, Propco will be advised on: The bids received The analysis of the bids The preferred delivery partner and basis for recommendations

12 Procurement risks and how they will be mitigated The time, cost and performance envelope for delivery of the scheme B9. On the basis of this advice, the Panel will be asked to endorse the proposed procurement of a delivery partner to implement the recommended scheme. Graham Glenn Valuation and Estates Manager