I had the pleasure recently of attending the Spring South West branch meeting of the Association of Chief Estates Surveyors (ACES). ACES membership is formed from leading property managers in the Public Sector. A topical subject which often arises in these meetings is the growing trend of local authorities investing in commercial property. It goes without saying the trend has grown exponentially in the last 2 or 3 years.
Evidence from peers suggests the vast majority of commercial property investments by local authorities have happened in England and in many cases have been outside of an authority’s boundary. It is useful just to list a few transactions that I am aware of to give a sense of the value of assets being purchased for example, Surrey County Council have purchased Malvern Shopping Park in Worcester for 74m and Runnymeade Borough Council brought the Chiswick Green Office campus in West London for 65m. Torbay Council is therefore not unique in adopting a similar approach, also purchasing property investments out of area. For example a distribution warehouse in Medway, Kent and a retail superstore in Dorset. The main motivator for investment activity in my opinion has been driven by the need to respond to central government funding restrictions that have been instigated over the last 6 or 7 years. As the cuts have bitten deeper in the last few years, some authorities have been forced to adopt more robust transformation programmes, identifying not only savings and efficiencies but also income opportunities that hitherto, for a variety of reasons would not have appealed just a few years ago. In simple terms, if an acquiring authority can borrow funds to purchase an asset and then that asset provides a return that not only repays the borrowing but also provides a revenue stream, then it is an attractive proposition.
The main concern and therefore reluctance for authorities to invest is not having a complete understanding of the risks involved in property investment. If the risks are known and considered and then weighed against the returns that can be generated from the income streams that are derived from an investment then I think more local authorities would invest. A factor most often put forward as a risk is whether the acquiring authority really understands the property markets, particularly away from their own jurisdiction. Furthermore are authority’s best placed to compete with institutional investment bodies, such as private investment fund managers?
Well the good news is there is a wealth of examples of local authorities across the country investing in commercial property. Those organisations have been able and in some cases bold enough to capitalise on preferential borrowing rates from sources of income such as the Public Works Loans Board to be competitive in the investment market. The experience gained can be shared and often is. Experience we have learnt is that competition for investment opportunities is fierce. But having a clear mandate and decision making process coupled with an established risk management framework enables swift decisions to be made.
However many authorities still see property investment as something of a diversion away from their main purpose and will not therefore fully embrace the opportunity. I believe the main reason as I said before is not understanding the risk; this is primarily where there is little or no support both internally from an organisation or externally from specialised advisors. Whether an authority decides to purchase an asset in its own right, enter into a joint venture or some form of Real Estate Investment Trust (REIT) depends very much on those councils having the right people with the right skills in place, who are subsequently able to install the necessary culture of change to find these innovative ways of closing the funding gap.
It is clear local authorities are still very much in the market seeking out property investment opportunities. Unfortunately things never stand still and central government has recently decided to restrict geographically the limits of where councils can invest in property investments. So in the immediate future we will not be looking at opportunities on the other side of the country. For Torbay Council however the geographical area has been set still fairly wide and will cover the Local Enterprise Partnership geographical area, incorporating Devon and Somerset. Torbay Council has embraced the world of investment opportunities, purchasing assets that offer good levels of return. They have put in place a robust decision making process that is be able to act with pace and is therefore competitive. I am pleased to say TDA will therefore continue to identify suitable opportunities across the region to supplement Torbay Council’s growing Investment Portfolio.
Paul Palmer is the TDA Estates Manager and can be contacted on [email protected]