The property market can bring big rewards but there are big risks too and there are plenty of people in Hastings still unaware that their council has borrowed tens of millions of pounds to be repaid by local council-tax payers over the next 50 years. Do Hastings Borough Council’s figures add up and are it’s processes to check if its getting a good deal robust enough? Conservative Councillor Andy Patmore has his concerns.
Ever since councils embarked on the purchase of commercial property to generate income, controversy has reigned writes Andy Patmore.
For example Spelthorne Borough Council has borrowed £1billion from the Public Works Loan Board (PWLB) to fund the most extravagant of spending sprees.
A little background first. The PWLB is backed by The UK Treasury and its function is to lend money from the National Loans Fund to local authorities and to collect the repayments. councils have taken a view that because interest rates are historically low, they can repay loans at X get rental income at Y and pocket the difference.
Business like this goes on every day in the commercial world. Running a commercial property portfolio has always been a lucrative business and your pension might be invested in such funds.
However these funds and companies are run by property investment experts and professionals. Their livelihoods, reputation and their companies’ sheer existence depend on their ability to crunch the numbers, do the due diligence and then take a commercial decision based on their expertise.
When local councils decide to make such investments they don’t have this type of specialist commercial knowledge and have to use consultants for advice. For example, Hastings Borough Council (HBC) tends to use a company called Savills, a very large property agent who act for buyers and sellers.
It could be argued that using agents such as Savills can lead to a conflict of interest. When the retail park at Sedlescombe Road North came up for sale, containing Dunelm Mills and Pets at Home, the site was owned by Aviva. After the financial crisis in 2007, the Aviva property portfolio was in trouble and they subsequently put £400m of their property portfolio on the market. Suffice to say, they didn’t put their best performing assets up for sale. Indeed, out of the £400m worth of disposals the Dunelm/Pets at Home site in Hastings was a poor performer in comparison to some of the other sites that were up for sale.
Wilkinson Williams were the selling agents and HBC employed Savills as their buying consultant. It transpired that Savills were also acting for Aviva as the selling agent for other parts of Aviva’s portfolio, leading to possible conflicts of interest.
HBC paid circa £8 million for this site. At the time, Councillor Rob Lee and I voted against this acquisition. Our argument was that HBC is not commercially savvy enough to know whether the price we were paying represented good value for money or not.
We are heavily criticised at cabinet for voting against such deals. However, our central argument is not against the principle, but the question is always whether the council is getting best value because ultimately it is the council tax paying residents who pay for it.
Cabinet members are given scant figures and no long-term business plan. They rely heavily on officer advice and refer to something called ‘The Property Purchase Matrix’.
The Property Purchase Matrix is a set of criteria created by the council so that, when you plug in all the numbers and factors, it gives a score or rating for any property purchase under consideration. A score of 84 or higher is deemed as acceptable with the highest score being 168. The Dunelm/Pets at Home site scored 146 on the matrix.
Concerns about best value and the usefulness of the ‘property matrix’ have been thrown into the spotlight recently.
Two years ago the council was offered the site in the town centre that includes Debenhams. It was being offered for around £10m at the time. The deal scored highly on the property matrix. At an Income Generation meeting a strong case was made to purchase the property and due diligence was undertaken.
The building, as it turns out, was not in the best of condition and although Debenhams (as the tenant) are liable for repairs it was thought that it couldn’t be relied upon to make those repairs. The council’s leader Peter Chowney said at the time: “I guess we might look at it again if they knocked a couple of million off the price.”
Lo and behold the freeholder went in to administration and the property came back on the market at £2.75m. So the original asking price was £10m, Mr Chowney thought that £8m was a good price but the real valuation was £2.75m. When you are dealing in multi million pound deals a £2m reduction can seem like quite a bargain. This all goes to show how fraught and contentious property valuations can be.
It has been suspected for some time by industry commentators that commercial property prices have been inflated by local authorities clambering to get on the bandwagon. When you can borrow 100 per cent loan to value, don’t have to really justify the value, don’t have to explain to the lender if you can afford the loan, factor in a possible property bubble – does this sound like déjà-vu? Do you remember what happened in 2008 to the residential property market?
Of course it’s all sunny at the start, there are some good leases from companies such as Carpet Right, Pets at Home, Dunelm Mills, TK Max and Jewsons, the profits are rolling in at the moment. But wait a minute, I hear you say, aren’t big retailers struggling at the moment because of internet shopping, high rents and business rates?
Many retailers have been seeking Individual Voluntary Arrangements commonly known as IVAs, whereby businesses agree to pay less rent, among other emergency measures with creditors, helping them to stay afloat. This means generally there is downward pressure on rents at the moment, landlords are being squeezed.
The government recently issued new guidelines which said that councils couldn’t solely invest in commercial property without having a regeneration aspect but all Hastings Borough Council did was change the wording on reports from ‘Income Generation’ to ‘Regeneration’ – hey presto!
The House of Commons Public Accounts Committee issued a report in which it warned local authorities are increasingly turning towards risky commercial ventures in a bid to tackle widening budget shortfalls. MPs on the committee said business and property deals could backfire due to a lack of commercial expertise within councils. Committee chair, Labour MP Meg Hillier said: “If this all goes wrong are we going to blame the consultants and let the tax-payer foot the bill?”.
Of course I recognise that cuts to local government have been deep. The Local Government Association (LGA) says councils have little choice but to look for ‘alternative’ sources of income given the steep cuts in government funding. Having acknowledged that, it doesn’t mean to say that the council should be taking huge risks with public money.
I would end by saying that it is obviously my hope, for the town’s sake, that the money from these risky ventures keep flowing in. What the future holds and how much more income could’ve been generated from the tens of millions of pound borrowed only time will tell.
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