Many of you will have seen the recent national press coverage of local authority investment in commercial property - it has understandably generated a lot of interest and many residents have come to me with questions.
The first thing to say is that owning and operating commercial property is not new to MVDC, or to local authorities generally, and MVDC has owned such properties for very many years, primarily to support the economic wellbeing of the District.
However, in 2016, MVDC decided to increase its level of investment in commercial property, including outside the District boundary, as a means of generating funding for our public services.
In the past few years, following the 2008 financial crisis and the implementation of 'austerity' measures, MVDC has consistently taken the actions necessary to live within its means, while continuing to deliver the public services that our residents expect and deserve. We have made efficiency savings of more than £8m pa, (reducing the Council's net budget by 36%). The key approaches to achieving this have included:
- Better value for money from contracted out services, for example leisure services and waste collection;
- Development of information technology, to deliver more efficient and customer focused business processes;
- Revised staffing structures and increased productivity;
- Development of shared services with other local authorities.
Consequently, MVDC has been able to able to protect, and in some cases enhance, existing services within significantly reduced funding levels.
By 2020 however, further reductions in government funding may mean that MVDC will no longer be receiving any direct government support and so may need to become entirely self-funding. This would leave approximately one quarter of the Council's public services funded by Council Tax, with the other three quarters needing to be funded by commercially generated income.
The business case for expanding the Council's commercial property activity has been developed with support from the same specialist commercial property advisors and accountants that support the world of private sector property investment.
This has led to a robust framework for evaluating potential investments, to ensure that risks are minimised and value for money is achieved.
a) Every potential purchase is evaluated against a fixed set of criteria. These include:
- Financial criteria: each investment must exceed minimum 'hurdle rates' for both the short term return, and the longer term prospects, together with an 'exit strategy should the Council wish to sell the asset.
- Risk criteria: An analysis is undertaken of the risk associated with any potential purchase, and only relatively low risk assets are considered. Key factors include: the tenure of the asset; the number and nature of the tenants, and their financial security; the length of tenants leases; and the responsibility for repairing and insuring the property.
b) This evaluation is supported by a formal valuation and investment appraisal undertaken by independent commercial property advisors.
c) Any proposed bid is considered by a cross-party working group of Councillors, prior to a bid being made.
d) If a bid is accepted, a robust 'due diligence' process is undertaken to confirm that the Council is buying what it thinks it is buying, and that it represents value for money. The purchase is only finalised when the due diligence is satisfactorily completed and the valuation confirmed by our independent commercial property advisors.
MVDC's first purchase has been the site of an ASDA superstore in South Wales. This cost £11.5m (including costs), and provides a rental income of £599k pa, (a yield of 5.2%). The purchase is 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 ability to pay. The tenant is fully responsible for the repair, maintenance and insurance of the building.
Ultimately these investments will generate significant income to support the delivery of our vital public services in Mole Valley. However, it is imperative that only the right assets are purchased, at the right price. We are confident that this is achieved through the rigour of the Council's policies and processes, and that they represent value for money for tax payers.