Property Investment Strategy
Mole Valley District Council is committed to generating income to support the delivery of services for residents and businesses.
In the past few years, Mole Valley District Council (MVDC) has made efficiency savings of over £8million per year.
During that time, MVDC has still been able to protect, and in some cases enhance, existing services. By 2020 however, further reductions in Government funding may mean that MVDC needs to become entirely self-funding. The decision to invest carefully in commercial property is entirely driven by the need to generate income to support services.
Owning and operating commercial property is not new to MVDC, having owned such assets for many years. An experienced property team works on acquiring suitable assets, to deliver a rental income stream.
Why does the MVDC need to generate income?
Following the financial crisis and the implementation of austerity measures in the past few years, MVDC has made efficiency savings of more than £8m per year, (equivalent to a saving of 36%). This has enabled service provision with a very significantly reduced funding level.
MVDC is facing further reductions in government funding and is exploring ways to become self-financing and more commercial by generating additional income to support services.
How are the properties bought?
The business case for purchasing properties for income generation purposes has been developed with support from specialist commercial property advisors and accountants.
This has led to a robust set of criteria against which every potential purchase is evaluated. These ensure that the assets deliver value for money for both the short and long term, as well as representing an understood and acceptable risk profile.
The evaluation of potential properties is supported by a formal valuation and investment appraisal undertaken by independent commercial property advisors. Once these criteria have been met, and a bid for a property is proposed, it is considered by a cross-party working group of Councillors, prior to a bid being made.
If a bid from MVDC is accepted, a significant 'due diligence' process is undertaken in relation to both the building and the legal title to ensure that the property represents best value. The purchase is only finalised when the due diligence processes are satisfactorily completed.
What are the criteria for purchasing properties?
MVDC has adopted robust financial criteria to assess the income in the short and long term. Properties need to achieve minimum hurdle rate for the income it will generate immediately (Net Initial Yield). They also need to demonstrate that returns will be maintained during the ownership of the asset and identify an exit strategy should MVDC wish to sell the asset.
An analysis is undertaken of the key factors affecting the risk associated with any potential purchase, and only relatively low risk assets are considered. These factors include:
- The number of tenants in the property, and the length of the leases
- The ability of the tenant(s) to pay their rent on a long term basis, (their 'covenant strength', confirmed via Dun and Bradstreet criteria)
- The tenure of the asset, (freehold or leasehold, and if leasehold, the length of lease)
- The ownership of the responsibility for maintaining and insuring the property
For a summary of the selection criteria and contact details for officers responsible for the identification of investment properties, please visit our Agents page.
Why can't the money be spent directly on services?
The property investments are funded by money borrowed from the Public Works Loan Board. The law says Councils can only spend borrowed money on assets with a life of more than one year and where it is going to make a profit or save on existing costs. This means some of the money generated or saved can be used to meet borrowing costs. It would be illegal for Mole Valley to spend this money on day-to-day services.
Officers regularly consider properties within Mole Valley, and all properties are considered in the context of the selection criteria outlined above.
The income generated by the rental income of the properties is spent on services.
What properties have been bought so far?
MVDC's first purchase has been the acquisition of the site of an ASDA superstore in South Wales. This cost £11.52m, (including costs), and provides a rental income of £599k pa, (a yield of 5.2%). The purchase is very low risk, being a freehold acquisition of a new building, (constructed 2012), let on a long lease, (expiring 2037), to a single tenant, (ASDA), with a very strong covenant, (ability to pay). The tenant is responsible for the repair, maintenance and insurance of the building.
MVDC completed on the purchase of Focal Point, in Leatherhead in December 2017 at a cost of £8.57m, (including costs). This is a pair of high quality office buildings let to Toshiba and Cisilion providing a rental income of £517k pa (a yield of 6.07%).
In January 2018 MVDC completed on the purchase of Unity House, Basingstoke at a cost of £18.66m including costs. This investment provides a rental income of £1.06m pa, a yield of 5.64%. This is a further low risk, freehold acquisition. It is let on a long lease expiring in 2033. The single tenant Game Retail Ltd have a very strong covenant and are responsible for all maintenance and running costs.
What else is Mole Valley doing to generate income?
Mole Valley already owns a £30m portfolio of land and property within the District, which creates approximately £2m of rental income per year.
MVDC's Transform Leatherhead project is a 10 year, multimillion pound project to regenerate Leatherhead town centre. It will create a wider range of shops, new housing, leisure and community facilities to make Leatherhead a better place to live, work and visit.
MVDC recently purchased two properties in Leatherhead:
- The Swan Centre was bought for £7.95m in April 2016. A further £1.4m has been allocated to improve the Centre. These improvements include a short-term refurbishment of the common areas and car park and the creation of additional retail units together with commissioning a viability study for long-term proposals for reconfiguration and redevelopment.
- Claire House and James House are two 1970's built offices which were bought for £3.25m in 2015 and are currently let on a temporary basis. Outline plans are being progressed for a new mixed-use building comprising residential and a café, together with a Riverside Park.
Other key property activities include the redevelopment of Dorking Football Ground to improve the district's sporting and leisure facilities with a 3G artificial grass pitch, soft play area and café, and the development of a new Master Plan for the Pippbrook and Reigate Road sites in Dorking.