South Somerset’s Commercial Investments: Your questions answered
You may be aware that South Somerset District Council has become more commercial to ensure we can protect services and fund community projects in the face of severe reductions in Government grants.
It has been successful, putting us in a strong financial position where we can produce balanced budgets with no cuts to services and we can fund projects such as the regeneration of our town centres.
You have been asking us a number of questions in the past few weeks about the strategy, particularly our commercial investments.
Here you’ll find answers to the questions we have received:
Why is South Somerset District Council investing in commercial projects and buildings?
Acting more commercially has helped us ensure we can safeguard the essential services we deliver (from preventing homelessness and providing benefits to playparks and planning) as well as providing the funding that supports important community projects like the regeneration projects in Yeovil, Chard and Wincanton.
Between 2018 and 2022, the council needs to deliver savings rising to £6 million per year. This is in addition to having to cut its costs substantially since 2010.
This is largely because Government grant funding to SSDC has dropped by 70 per cent since 2010 and further reductions are likely in the future whilst demand for and costs of many services continues to rise.
The council had a number of choices. It could have made sweeping cuts, as other councils have to the detriment of communities, or outsource more of its work which would also have its drawbacks.
Instead, SSDC decided the best way to serve its residents was find a way to make the most out of its assets and look for new opportunities which could generate income. This will help to protect the wide range of services our communities receive, as well as create opportunities to fund new projects.
It has seen the Commercial Services and Income Generation team given an ongoing annual income target of £3.35m for commercial investment income and they continue to hit those targets.
This is about making prudent and risk-assessed financial decisions which will create significant income to get the best results for South Somerset.
There are huge sums of money involved. Why can’t you just spend this on improving South Somerset?
The costs of the services the council provides arise each year. They are funded by money from a mixture of sources including Council tax, Business Rates, other grants, and some other income from fees, charges and property rents. All of this annually recurring spending and income is called revenue.
The council also uses money in the form of capital but only to pay for one-off projects with long term productive value.
The council identified that by borrowing capital to invest in commercial property it would be able to generate enough annual income from that property to pay for the interest charged on that capital, to gradually pay back the capital and leave the council with surplus net revenue to help fund its services.
The council is not legally able to use capital to pay for annually recurring costs. But if it did, the capital money would be used up over a series of years leaving the council needing to divert money away from its services after that to pay the interest and repay the capital.
Commercial investment is absolutely the right decision as it provides the income we need to provide services and invest in South Somerset.
Effectively, money can only be spent once on certain things, whereas if money is invested it will provide a revenue by way of financial returns, year after year, to keep paying for our services, giving certainty and resilience for the future.
Therefore, commercial investment is absolutely the right decision as it provides the income we need to provide services and invest in South Somerset.
I’ve read that these deals are being made in secret. Is that true?
Far from it, the council has been open and transparent about every element of this process. The Commercial Strategy – including who is authorised to make commercial decisions - is available publicly and was agreed at a public meeting by democratically elected councillors.
Every commercial investment, and the amount we’ve invested, is disclosed publicly at the earliest possible opportunity. Any changes to the Commercial Strategy are debated and released publicly while reports on the status of our investment portfolio are provided publicly every few months.
In order to operate successfully commercially, details of every deal cannot be released in advance if we are to get the best deal for the residents of South Somerset. You wouldn’t release details of your negotiating position to others when you are bidding on a property or project. But as soon as we can make the details available, we do.
The Council has up to £150M available for commercial investments through to 2022 To date, a total of £92.5m has been invested, producing in 2020/21 a gross yield on the investment properties of 7.16%, compared with the target to average 7%. In cash terms, this is providing millions a year already which is going directly in to protecting services to residents or investing in our district and our communities.
Why aren’t you solely investing in buildings or projects in South Somerset?
In simple terms, there are very rarely commercial opportunities that come up in South Somerset for us to invest in. In addition, this is about making prudent financial decisions which will create significant income and spread risk, to get the best results for South Somerset but still, where possible, supporting the local economy.
With that in mind, the investment strategy is about creating a regionally diverse portfolio that maximises financial returns and seeks to mitigate and reduce risk, to ensure we get the income we need to support services and communities.
For example, similar investment opportunities may exist in South Somerset or outside the county. If the opportunity in South Somerset will generate the same level of return as the opportunity outside the district and it meets or exceeds our target, we would look to invest locally.
However, if the local opportunity will not generate the target yield we need and the one outside the county will, we would look to invest in the latter.
If we held all of our investments within our area this would increase the portfolio risks and mean that we missed out on some beneficial opportunities to maximise income and to consider certain investment opportunities that just do not occur within our area.
The primary aim is to generate income which creates the sounds financial base from which we can fund services and projects in South Somerset now and in the future.
I’ve seen it suggested that SSDC has taken too many risks with commercial investment. Is this true?
While there is always an element of risk in investing, every decision that is made is being rigorously tested and checked. The Commercial Property Team is working incredibly hard to ensure that SSDC does not overpay for property due to the lack of supply, and is not exposed to undue risk, for example within the retail sector, where significant changes are currently occurring nationally.
A huge and diverse range of opportunities have been considered and rejected. Reasons for rejection can include the asking price not matching our valuation, unacceptable risk to income, non-compliance with our commercial aims and objectives, and over-exposure to a particular market.
Our approach has been subjected to both external and peer scrutiny both concluding that we have "proper governance arrangements to secure economic, efficient and effective in its use of resources". Our internal and external auditors have reiterated that our processes are sound.
We’re aware that some councils have been accused of over-investing but that is very far from being the position in South Somerset.
How has the Commercial Investments strategy been impacted by Covid-19 and if the crisis has created a financial shortfall, why can’t you sell properties to cover it?
Our Commercial Strategy, particularly our investments strategy, has put us in a strong financial position heading into the Covid-19 crisis.
The council has suffered a loss of income through the closure of entertainment venues and loss of car park income, for example, as well as committing to additional spending to support our communities. The Government has said it would cover these losses and we are urging the Government to honour this commitment.
As such, any financial pressure we face is not linked to property investment. Indeed, a very high percentage of commercial rents have already been collected - a substantially higher percentage than a series of top-flight commercial landlords and property investment funds. This demonstrates how SSDC’s total level of investment, and the strategy in selecting the assets acquired has been prudent and effective.
We are anticipating that there will be some loss of commercial rent income as the impact of Covid-19 continues to adversely affect the economy nationally, but commercial investment risks were planned for as part of our management process. The figures have been included in our report to give a full picture to residents and the Government about the impact of Covid-19 on our finances.
Since the outbreak of Covid-19, the Council has completed on one property, King William House, Queen Square, Bristol on 20 March. Other investment activity has been paused as the Property Investment team undertakes analysis of similar scenarios to determine the best strategy for future investment. We are already seeing the market begin to reopen and are well positioned to take advantage of opportunities that may arise.
We could, hypothetically, sell all the commercial investments we have and cover the immediate shortfall in finances due to the Coronavirus crisis.
However, this would mean a major loss of yearly income that we had secured for the future. We would be in an even worse position when it comes to creating a balanced budget, protecting key services and funding the projects which will allow our communities to recover from the Coronavirus crisis.
If commercial investment is the right approach, then why aren’t all councils doing it?
Our success demonstrates how commercial investment, with the correct level of risk management and diligence, was absolutely the right decision for South Somerset. Our team has been doing a phenomenal job.
The work we have undertaken has been recognised nationally as part of highly prestigious awards such as the MJ Awards and we are currently shortlisted for the Entrepreneurial Council of the Year prize at the LGC Awards.
It is not up to us to determine how other councils should be managing their finances and they will all have different positions and financial requirements.
We are focused on delivering the best possible outcomes for South Somerset and we have developed a reputation in the property investment market for acting quickly and professionally. This ensures that SSDC is offered the most attractive opportunities and does not overpay for property.
What investments have been made?
The full list is available on our website but here is a brief summary:
Alchemy, Welwyn Garden City - purchased in December 2019 for £9.72m, a net initial yield of 7.0%. A 40,000 sq ft multi-let grade A office space, tenanted by T-Mobile, Pinnacle Engineering, The Environment Agency and Affinity for Business (who have subsequently been acquired by Castle Water)
Sherwood Road, Bromsgrove - Purchased in December 2019 for £3.7m, a net initial yield of 6.58%. A 36,882 sq ft, four unit, trade counter scheme, tenanted by Screwfix, Howdens and Toolstation (all considered to be the strongest possible tenant by credit rating agency Dun & Bradstreet). The site is situated in the centre of the principle industrial estate in the town. The yield will revert to circa to 7.17% following the outstanding rent review.
King William House, Bristol - The most recent acquisition was completed in March 2020 for £5.4m, reflecting a net initial yield of 7.5%. This is a 28,000 sq ft multi-let office building, in a prime location in central Bristol.
Centurion Mill, Sowton Industrial Estate, Exeter - The property comprises two industrial buildings, totalling 72,246 sq ft, on the well-established Sowton Industrial Estate, between the M5 and Exeter’s city centre. The investment will deliver a net initial yield of 7 per cent.
'The Ralph' veterinary referral hospital, Marlow - South Somerset District Council has acquired the site of The Ralph for £5,950,000 with a net initial yield of 7.09%.
B&Q, Glastonbury - SSDC acquired the 27,000 sq ft retail warehouse, with 8,000 sq ft external garden and 4,000 sq ft secure delivery yard, for £4.405m as part of our commercial strategy, reflecting a net initial yield of 7.19%.
Reevesland Industrial Estate, Newport - The building is the UK distribution hub of worldwide toy and boardgame giant Hasbro and it was secured for £2,780,000, reflecting a net initial yield of 7%.
Business Park, Christchurch - South Somerset District Council's investment in a business park in Christchurch was secured for £7.05M, considerably below the market value, reflecting a net initial yield of 7.07%.
Bell House, Milton Keynes - SSDC acquired Bell House in Milton Keynes for £2.925M. It comprises 10,695 sq ft of Grade A office accommodation constructed in 2007 over four floors. It is let to four tenants, including regional solicitors Howes Percival LLP and reflects a net initial yield of 7.27%.
GoCompare Headquarters, Newport - Imperial House in Newport, which is the headquarters of comparison giant GoCompare, was acquired by South Somerset District Council for £4.66M and reflects a net initial yield of 8.06%.
Linden House, Bristol - Linden House, in the affluent Bristol suburb of Clifton, has been purchased by South Somerset District Council for £2.75m, reflecting a yield of 7%.
Units 1 & 2 Dunball Industrial Estate, Bridgwater – It was purchased by South Somerset District Council for £2.82m, well below the marketed value of £3.025m with a 7.51% net initial yield.
Residential Development, Marlborough - SSDC purchased a former NHS nursing home in Marlborough for conversion into apartments and some new houses in the grounds. Practical completion for this development of 15 flats and 3 houses was achieved in October 2019. It is likely that sales will take around 12 months to conclude once we can fully market the residential units, due to the impact on the market of COVID-19.
Energy Storage Facility, near Taunton - Somerset will be at the cutting edge of renewable energy storage thanks to a significant investment in this facility. The Council, in partnership with Somerset-based Opium Power Limited, is creating a 25MW Battery Energy Storage facility (currently being increased to 30MW) that will provide essential power management assistance to the National Grid. It is one of the largest and most-advanced in the UK. It comes as a result of South Somerset District Council investment, with a 7.5% initial yield.
Marks and Spencer, Yeovil - This retail investment continues to provide strong annual revenue to SSDC.
Wilkinsons, Yeovil - This investment also continues to provide strong annual revenue to SSDC and performs well as an anchor store in the town.
What about assets including buildings the Council already owns?
SSDC's Commercial Property Team is assessing a number of land and property assets currently owned by the District Council in order to ensure that all assets held are for community use, council operational needs, part of a strategic regeneration programme or purely for investment in order to generate income.
Each asset assessed by the team will be looked at to rate its performance under the above headings. Assets that don't meet a set of criterion will be offered for sale on the open market.
Community Groups will also have the option to submit a business case to take on certain assets for their own use. The income from the sale of assets will be used to invest in projects that create an income for the council to use in providing services to the district or to regenerate our towns and local facilities for the benefit of our communities.
We’re also working to ensure all assets we hold are used in the most commercially efficient way. For example, our main building in Yeovil – Brympton Way – is now part-let to Somerset County Council and Avon & Somerset Police, while improvement works are carried out to the police building in Horsey Lane.