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APPENDIX B
Borough of Poole
Corporate Property Investment Strategy
2014 – 2016 PART I
PRINCIPLES AND ANALYSIS OF PORTFOLIO
Buildings
Land
PROPERTY
ASSETS
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Contents
No.
Part I – Principle and analysis of portfolio
1
Introduction
2
Background
3
The Borough’s Property Investment Portfolio
Part II – Protocols and Governance
4
Property as an Investment Vehicle
5
Investment Strategy - Hold
6
Investment Strategy – Acquisition
7
Investment Strategy – Disposal
8
Links to other Corporate Strategies
9
Action Plan
10
Governance
11
The Council’s endorsement of Property Investment as Entrepreneurial
Activity
Part III – Action Plan
Action Plan 2014/15 – 2017/18
Part IV – Appendices
Appendix A – Overview of Investment Asset Portfolio
Appendix B - Glossary of Terms
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1.
1.1
Introduction
The Corporate Property and Asset Management Strategy (CPAMS) which was
developed and approved in 2013 adopted six principles, one of which (principle four)
is “We will encourage innovative and entrepreneurial activities which provide a
commercial foundation to developing and embedding an investment strategy.”
1.2
Increasingly, pressure is being applied to public sector estates teams to strategically
manage their organisation’s property assets and to think commercially about property
investment decisions. At the same time, there is pressure to continue to provide
better local services and raise standards, whilst operating under increasing financial
constraints, including a reduction in central government grant. In response to this,
some authorities are now acting to strengthen their funding base and reduce their
reliance on such government grant by developing asset portfolios that provide a
commercial return.
1.3
This Corporate Property Investment Strategy document recognises these pressures
and develops and embeds this fourth principle of the CPAMS, including the
establishment of appropriate governance arrangements. It will also have strong links
to the emerging plans for more commercialisation.
2.
Background
2.1
The Borough of Poole has, at present, a relatively modest asset portfolio compared
with many authorities.
2.2
The purpose of holding or acquiring property for investment purposes is primarily to
generate income or for future capital appreciation, although in some cases assets are
held for investment in order that they can offer the potential to unlock future
development opportunities or potential value that pure commercial organisations
would find difficult to achieve.
For the past few years, the investment property market has been fragile and as a
result values have stagnated owing to lack of interest from potential buyers due to
the uncertainty in the current economy. This provides the potential to make good
value investment decisions at a time when interest rates are at an advantageous
rate. The Council can also look to achieve a balance of social, environmental and
economic benefits when making property investment decisions.
2.3
In its Corporate Property and Asset Management Strategy the council has also
stated its resolve to explore joined up ways of working with communities and
businesses and the further development of an investment strategy demonstrates the
council’s ability to make progress. An investment strategy can be centred on
supporting residential development, growing business activity, and augmenting the
leisure and tourism investment in the town. Adoption of an investment strategy which
sets out the principles of reinvestment can further embed value for money principles.
2.4
Other authorities have already pursued similar investment strategies with great
success and now have mature investment property portfolios. In producing this
strategy the Borough has drawn upon the experience of other local authorities.
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2.5
Through the adoption of this strategy Poole can make some inroads by being
innovative in its approach to property investment and acquisition.
3.
The Borough’s Property Investment Portfolio
3.1
The Borough’s current property investment portfolio comprises 88 assets with a total
capital value of circa £27.23m.
3.2
The following charts and tables illustrate the current range, scale and natures of the
assets held.
Capital Value of Portfolio
Sector
Communications
Health
Housing
Industrial
Leisure
Other
Retail
Agriculture
Grand Total
Capital Value of Portfolio
Current Value (k)
£
922
£
2,590
£
591
£
1,503
£
5,718
£
617
£
13,750
£
1,538
£
£27.3m
3%
6%
Communications
2%
10%
6%
Health
Housing
Industrial
Leisure
21%
50%
Other
Retail
Agriculture
2%
Income By
Sector within
Portfolio
Sector
Communications
Health
Housing
Industrial
Leisure
Other
Retail
Agriculture
Grand Total
Current Income of Portfolio
Current Income (k)
£
61
£
329
£
6
£
150
£
434
£
51
£
910
£
20
£
1.96m
6% 3%
Communications
10%
2%
6%
Health
Housing
Industrial
Leisure
21%
50%
Other
Retail
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2%
Agriculture
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Projected Income By Sector of Portfolio
£2,500,000
Retail
£2,000,000
Other
£1,500,000
Leisure
£1,000,000
Industrial
Housing
£500,000
Health
£Sum of
Income
2014/15
Sum of
2015/16
Sum of
2016/17
Sum of
2017/18
Sum of
2018/19
Communications
Sum of
2019/20
Agriculture
Portfolio by Number of Assets per Sector
Split of Assets by Number
Sector
Communications
Health
Housing
Industrial
Leisure
Other
Retail
Agriculture
Grand Total
Number of Assets
12
5
12
12
28
9
8
2
88
2%
9%
Communications
13%
6%
10%
Health
Housing
Industrial
14%
32%
14%
Leisure
Other
Retail
Agriculture
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3.3
The portfolio balance is heavily geared towards retail, with one asset comprising 44%
of the total portfolio value, and the top 10 assets forming 75% of the portfolio.
3.4
The investment portfolio has historically been classified in accordance with the
CIPFA categorisation. The test is whether the asset is held solely for the purposes of
income generation or capital growth. This test needs to be applied more rigorously to
the portfolio to ensure that investment properties are only classified as such when
they are not also delivering indirect services. The net effect of such a review is to
reduce the number and value of assets in the health sector, and increase those
within the leisure sector.
3.5
Local Authorities have a tendency to hold properties that generate income but are
located in such sensitive locations that the investment would not be sold. The council
has several of these assets. This will have the effect of reducing the number of
assets within the portfolio which could be realisable.
3.6
Further details of the Portfolio are contained in Appendix A.
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Borough of Poole
Corporate Property Investment Strategy
2014 – 2016 PART II
PROTOCOLS AND GOVERNANCE
Buildings
Land
PROPERTY
ASSETS
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Part II – Protocols and Governance
4. Property as an Investment Vehicle – Risk and Returns
4.1
At its simplest, property is an investment in a piece of land or a building giving the
investor a return as rental income and/or capital value growth. Capital growth may
come through time either by holding the asset and/or be driven by asset
management initiatives and development.
4.2
Risks and returns in property investment come both at a market level and from
individual asset choice. The choice of location and the choice of property sector
influences the risks and returns associated with the investment. High growth
economies offer the potential of property values increasing in line with higher rates of
growth in GDP1, but they may also represent higher risk with anticipated future
growth already factored in prices being paid. At an individual asset level, there are
asset specific risks and opportunities. The estate manager has the opportunity to add
value through initiatives to improve buildings and manage the tenant roster. Asset
specific events, such as the loss of an important tenant, illustrate the risks at an asset
level.
4.3
The two components of property investment returns (rental income and capital
growth) are very different. The bond-like rental income return is stable and reliable
showing little volatility. Over 25 years the rental component of the IPD2 UK monthly
index it has never exceeded 10% per year nor dropped below 5% per year.
4.4
Rental income also has a linkage with inflation. In some leases, this may be
expressed contractually with rents increasing with inflation, albeit with caps and
collars to the increases. With others, the triennial or quinquennial rent reviews will
tend to follow inflation, but this is not always the case. In difficult economic times,
rents tend to fall on re-letting. It is also expensive to hold empty property. For
example, business rates are payable by the landlord on vacant properties. This
drives landlords of properties typically in secondary locations with little tenant
demand, to let them at whatever price they can just to avoid business rates. This
fulfils the objective of releasing as much property as possible for occupation, but
means that rental income and consequent capital values become much more volatile
in secondary locations.
4.5
The equity-like capital growth component of property returns is very variable and
volatile. Real property prices do not show the rapid price fluctuations of quoted
equities, but on a longer time scale, price movements can be just as severe. The
2.1% per annum long term UK capital growth component quoted in the introduction
hides years of boom and bust. Extraordinary growth of 20% to 30% per year was
recorded on 1987, 1988, 1994 and 2005 to 2007. These periods were followed by
busts with years of falling prices. In 2008 and 2009 values fell -20% to -30% each
year.
4.6
Asset management and development activity can drive property returns in a manner
less correlated with general property market/index returns, but such activity also
involves an acceptance of the risks attached to such activities.
4.7
Capital values of commercial property fluctuate significantly depending on the
security of the rental income. Like bonds, prices depend on the covenant strength of
1
2
GRP: Gross Domestic Product
IPD: Investment Property Databank
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the issuer and the length of the lease contract. Unlike bonds, the rental income can
be turned on and off as leases are issued and terminate. The value of an office block
in a secondary location, for example, can fall as much as 30% if a tenant decides not
to renew a lease. Correspondingly it will rise again if a new long-term tenant is signed
up. A typical private equity property strategy is to seek out buildings that are vacant
or with short leases, then refurbish some parts, re-let and re-gear the leases, then
sell realising the capital appreciation embedded in the new longer leases.
4.8
In practice, property investment can be structured to create a range of different
risk/reward profiles from stable bond-like annuity income performance to volatile
equity-like development returns.
4.9
When considering the potential for the Borough being active in the property
investment market there are a number of key risks that the Borough needs to be
aware of:
Acquisition Risks:

The property market is only now emerging from recession. Whilst there is less
institutional activity than in stronger times, there is increased competitive activity
from smaller property companies. This means it is highly likely that the council
will be one of several bidders for any good-quality assets available in the
Borough. This means it is highly like that the council will be an unsuccessful
bidder on a number of occasions during the implementation of its acquisition
programme. The council, both councillors and officers need to be aware of this
possible outcome.

Due to the nature of the property market, decisions may need to be taken quickly
in order to put offers forward. Of course, offers can be subject to conditions and
due diligence before proceeding to instructing legal advisors.
Cost Risks:

Abortive costs, including legal costs, survey fees, officer time, all may be incurred
in abortive transactions including costs for initial feasibility investigations.

Lack of suitable sites/buildings – Poole’s property market is restricted and is
dominated by secondary or tertiary assets that may not be of the quality the
council would acquire. There may therefore be a shortage of suitable stock in the
Borough.
Property Market Risks:

Property is an inherently riskier asset than other asset classes because of its
physical characteristics, which need to be managed and maintained. This is
ideally compensated by increased returns. However, the property market is not a
certain market and the Council may not achieve its target returns if market
conditions significantly worsen.

Many investment transactions happen prior to ever coming to the market.
Information is key and getting to know about properties for sale is important, this
can be done through contacting property owners and agents in the Borough
proactively, and also engaging a specialist investment agent to act on the
Borough’s behalf.
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4.10
The following diagram illustrates wider returns which the Borough of Poole would
anticipate to experience from direct property investment.
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Protocols
5.
Investment Strategy - Hold
5.1
The objective for the Corporate Property Investment Strategy is to help ensure that
the Council has a sustainable financial position over the medium to long term.
5.2
The strategy for holding or acquiring investment property assets is therefore to:
“Support the financial health of the organisation.”
5.3
In implementing this strategy we aim to:• Ensure the best return is obtained.
• Pursue opportunities to increase commercial return and improve investment value
of commercial assets.
• Ensure that our investment strategy is aligned to and supportive of the wider
Corporate Strategy within the Borough.
The rationale of holding property and asset investment in support of the
investment strategy.
Corporate Estates Financial Services will:a) Support the council in its endeavours to explore all opportunities to generate
additional income from its investment portfolio of land and buildings.
b) Support the council in exploring the opportunities in its portfolio of investment
properties assist delivering the aims and objectives of the Council that are
expressed in its Corporate Strategy
c) Identify entrepreneurial investment opportunities that will:i. Enhance value of existing portfolio
ii. Deliver improved services or in direct economic benefits e.g. letting to ‘start up’
businesses or investing in assets associated with local employers as Eastleigh
Council has done
iii. Improve opportunities for more comprehensive development opportunities e.g.
.Combination of Lodge Hill Montacute School and the Gravel Hill Police Station
iv. Develop partnership and collaborative working with other public and private
sector organisations, e.g. collocation of HSC and DHUFT Locality Teams
v. Improve the NNDR receipt to the council
5.4
Actions to be taken in support of the investment strategy in deciding upon the nature,
scale, and mix of the investment portfolio will include:
• Obtaining professional advice from investment advisors given the significance of
asset management to the generation of returns.
• Undertaking an annual valuation plus advice from the investment advisors to
inform the acquisition and disposal strategy to achieve a balanced portfolio at any
given time,
• Establishing a target rate of return which allows for the financing costs of
delivering the Investment Strategy to be met and the generation of an annual
surplus and which will be subject to annual assessment.
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• Ensuring that the property assets help will be of good quality with income derived
from good covenanted tenants in good or growth locations to include mixed
schemes avoiding, at least in the short term, asset management requirements,
Regular reviewing of the portfolio and establishing an agreed cap on the
percentage of income that is derived from a single organisation or tenant and a
cap on the single asset value as a percentage of Gross Asset Value.
6.
Investment Strategy – Acquisition
6.1
Ordinarily, a decision to acquire land and property interests on a pure investment
basis will depend upon levels of affordability and straight forward returns. As a local
authority, however, we have the ability to consider other ‘returns’ and considerations,
including:



The level of overall return, including not only rental income, but associated socioeconomic benefits, non-domestic rate income, and improved confidence
generally within the Borough because of investment decisions;
The ability to acquire vacant sites and assets where there is a strategic value of
the property, particularly in relation to future development in combination with
existing assets;
The ability to consider identified current or future service needs and the ability of
that asset to help deliver those needs, either directly, or through associated
effects.
6.2
These considerations make it imperative that any opportunity to enhance the
council’s financial health and deliver improved services and possibly kick start
regeneration should be considered and evaluated on a case by case basis.
6.3
The Corporate Estates Financial Services team have in the past considered one - off
investment decisions involving an acquisition. These have included:





The acquisition of the long leasehold interest in the Dolphin Centre and Towngate
Square when this was available with the intention that it could unlock
development potential in the Town Centre North area.
The acquisition of a freehold retail unit in the town centre that through relocation
of the Citizens Advice Bureau to enable the redevelopment of town centre sites
for affordable housing development.
The acquisition of sites for Poole Housing Partnership
The acquisition of the Gravel Hill Police Station which supported the Council’s
strategic aims and priorities
The inclusion of a community swimming pool into the Montacute School
development seeks to realise an advantageous shared use
6.4
These examples demonstrate how the decision making processes undertaken. In all
cases the consideration of whether to invest or not rested on protocols to be adopted
for all potential acquisitions of property interests.
6.5
Looking forward this strategy adopts the following protocols for Property and Asset
Acquisition.
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Protocols for Property and Asset Acquisition in support of the Investment
Strategy
Land and property interests should only be considered for acquisition if, after
consultation, the following circumstances apply:
a) The acquisition will make a positive contribution to the current delivery of council
services or promotes the financial health of the organisation.
b) All other methods for the delivery of this service have been investigated and an
options appraisal has been undertaken which highlights this acquisition route as
the most economically advantageous and efficient method of service delivery.
In addition to the above, the following circumstances may apply:
i.
ii.
iii.
iv.
v.
The acquisition of the interest has potential for future strategic regeneration
and/or redevelopment purposes in pursuit of the council’s strategic aims and
priorities
No other available land and property asset can provide a more cost effective
and/or efficient point of service delivery
There is an adopted council strategy, with resources identified, which will bring
the land or property into beneficial use in the foreseeable future
There is potential for advantageous shared use
The investment in land and buildings is used as a part of a wider treasury
management function for the allocation of capital to provide an
investment/revenue return in support of front line services. Any investment
decision would meet target hurdle rates of return
6.6
Each investment acquisition will be subject to a detailed business case that clearly
sets out the risks and associated mitigation measures and addresses market, legal,
financial, property and reputational issues. It is accepted that some investments will
generate a return in the medium to long term but make a loss in the earlier years.
7.
Investment Strategy – Disposal
7.1
In support of the investment strategy the Corporate Estates Financial Services Team
on behalf of the Borough will explore the business case for holding all the assets that
are classified as Investments within the CIPFA3 Code.
7.2
Non Strategic investments are then reviewed for continued income generation
purposes or for capital realisation.
7.3
This strategy adopts the following protocols for Property and Asset Disposal
Protocols for Property and Asset Disposal in support of the Investment
Strategy
a) Corporate Estates Financial Services will identify on a case by case basis, capital
realisation versus income in its investment portfolio and will dispose of an asset
that no longer performs against a set of criteria focussed on;
3
CIPFA: Chartered Institute of Public Finance and Accountancy
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i. Investment performance thresholds
ii. Knowledge of market conditions
iii. Special purchase considerations
b) The council will dispose of the freehold interest that it owns when
i.
it does not need to control the future development of the site or buildings into the
future.(and can rely on its statutory planning authority to control future use and
development)
ii. it does not need to ensure performance management of development
iii. it does not need to protect its own adjacent interests or those of its other tenants
into the future
8.
Links to other existing Corporate Strategies
8.1
Medium Term Financial Plan and the star chamber agreed actions (see
appendix A).Identifiable capital release/ increased income generation may impact on
the way in which services are delivered in future and decisions around deliverability
will be considered by the will be consider by the Management Team and the Council.
8.2
Corporate Property and Asset Management Strategy and Stock Condition
survey A full stock condition survey has been undertaken in 2013/ 2014. The
presentation of this data will identify those assets and buildings that require high
levels of repair and maintenance investment. With this information to hand the
organisation can make informed decisions around the future investment strategy it
should continue to make into maintenance of existing buildings versus the
opportunity to create a property and asset disposal programme.
8.3
Capital Investment Strategy of the Business Improvement Theme (see
appendix B) – identifiable capital release or improved income streams from assets
can be demonstrably redeployed as part of the Capital Investment Strategy of the
council e.g. Improved income flows from the Dolphin Centre have in the past been
redeployed to support new car park fee models which in turn should drive increased
pedestrian traffic within the shopping centre.
8.4
Poole Economic Development Strategy and Action Plan 2014-2019. This key
document will inform the Investment Strategy on the key anticipated and targeted
growth areas in the local economy.
9.
Action Plan: 2014 – 2016/17
9.1
The Borough will adopt the phased Action Plan which provides the detail of the short,
medium and long term actions that will be an aspiration to:



9.2
Increase the overall portfolio capital value by 10%
Reduce the number of underperforming assets
Improve overall returns by 10%
Short Term

Transfer all budgetary responsibility for the investment assets to Corporate
Estates
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




9.3
Medium Term



9.4
Undertake an initial appraisal and valuation of investment assets
Appoint investment advisor
Establish performance criteria for investment / other asset reviews
Identify initial strategic sector / area focus
Reporting to Corporate Change Board on initial asset review (alongside CPAMS
operational asset reviews) and
Annual review of portfolio with investment advisor
Sector reviews
Development of Concessions Strategy
Long Term


Investigate potential for creation of separate investment company
Investigate opportunities for Joint Venture partnerships / developments
9.5
A more detailed Action Plan is contained in Part III which identifies actions on an
asset by asset basis. ( Confidential)
10.
Governance
10.1
The pre-requisites to sound governance and agility in Property and Asset Investment
are:a) Member endorsement of this Strategy
b) A regular and appropriate reporting cycle against the action plan of projects being
delivered,
c) A delegated decision making process which is capable of working at pace within
the investment acquisition property market.
11.
The council’s endorsement of Property Investment as Entrepreneurial Activity
11.1
The council will promote the use of borrowed funds from Treasury or other sources
and will utilise those funds when:
a) There is a resultant regular and secure income stream,
b) Funds can be borrowed at an interest rate which is lower than the general cost of
borrowing or borrowing costs of partner organisations,
c) There are other deliverable community benefits (in addition to financial),
d) Each investment will analysed be at on its own merit with acquisitions of
investments should normally be pre-let to tenants of good covenant on FRI 4
terms, with an unexpired term of at least 5 years,
e) Where a property has strategic value to the council, some of the above criteria
may be relaxed e.g. land capable of development or required to enable
development such as acquiring land adjacent to the Civic Centre.
11.2
The council will endorse this strategy and will therefore:
a) Identify funds that it is prepared to invest in future investment opportunities on a
case by case basis,
4
FRI : Full Repairing and Insuring Terms where the tenant assumes all liabilities
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b) Seek where appropriate to prioritise acquisition involving partnering
arrangements,
c) Invest in good quality commercial property in traditional sectors i.e. retail, office,
industrial and leisure.
d) Seek to achieve an appropriate ROI5 depending upon the acquisition criteria,
e) Identify disposals and acquisitions that will consolidate the council’s existing land
holding portfolio and its ability to facilitate larger developments which will assist in
the modernisation of the Borough’s business infrastructure and/or encouraging
inward investment, re-location and business start-up within the Borough,
f) Act quickly and enable this through agile decision making processes which work
hand in hand with the pace driven by the property acquisition market.
5
ROI: Return on Investment
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