Question
According to papers that went to Audit Committee, Wokingham Borough Council has paid £14.5M for three commercial properties in Wokingham including Barclays Bank in Market Place for which the gross annual rental income is forecast to be circa £507k p.a. No information was provided to show
(a) What responsibilities (including financial) do Wokingham Borough Council have as Landlords (for example repairs etc).
(b) What the estimated annual costs are of servicing both the borrowing costs, the costs of repairs and administration of these properties.
With these costs taken into account, the net income could be considerably less than £507k a year.
What figures for costs and income were used in the business case that was made for purchasing these three properties?
Minutes:
According to papers that went to Audit Committee, Wokingham Borough Council has paid £14.5M for three commercial properties in Wokingham including Barclays Bank in Market Place for which the gross annual rental income is forecast to be circa £507k p.a. No information was provided to show
(a) What responsibilities (including financial) do Wokingham Borough Council have as Landlords (for example repairs etc.).
(b) What the estimated annual costs are of servicing both the borrowing costs, the costs of repairs and administration of these properties.
With these costs taken into account, the net income could be considerably less than £507k a year.
What figures for costs and income were used in the business case that was made for purchasing these three properties?
Answer
The Council as a landlord may have different responsibilities at different properties, let me try and explain that, depending on the nature of the property or estate and the terms of the leases in place. As you know we have a very professional team that is running this for many years in large organisations. We are very lucky to have an experienced team to do this.
Generally we are responsible for tenant care, income collection, insurance and the monitoring of tenant’s obligations and restrictions under the lease. A lot of due diligence has been done on these properties I can assure you.
The nature of the tenant’s obligations depends on whether the tenants are on a Full Repairing and Insuring Lease such as Barclays and Fishponds Road or an Internal Repairing and Insuring Lease, as at Mulberry. They are different depending on what they are.
In the case of FRI leases the tenants are responsible for the property in every way so we just collect the income. This lease model is popular with investors so attracts a lower rate of return as landlord risk and expertise to manage are lower.
In the case of IRI, like we have got at Mulberry, these are usually larger multi-let estates requiring a more professional management at the expense of the occupying tenants. These tend to be larger and more complex. However, the added complexity of risk and rewards are reflected in the rate of return.
Our portfolio is a mix of both types of lease. The income quoted of £507,000 is not the annual income from the assets required but an estimate of the likely gross income from the date of purchase to the end of March 2019. Annual income would be considerably greater.
Net in Year is measured on net rent receivable after any non-recoverable costs but before deductions for any debt costs. That is the basis on which the £507,000 that was reported for this period. It is an estimate of likely rental income before paying out interest on money borrowed.
After allowing for interest on debt and based on the current tenants, leases and income streams at all the properties the actual net income after interest payments for the full year 2019/20 is likely to be just under £600,000 showing a true net return of 3.80% on cost, which is a pretty good rate of return.
Supplementary Question:
Can you advise what interest rate this £14.5million was borrowed at by the Council? My information is that it was at 2.9%. Are you able to confirm this?
Supplementary Answer:
Obviously the rate from the Public Works Loan Board and where the Treasury function uses for using this money varies, but that is my understanding of the average rate.