To consider an update on the Property Investment Group, specifically relating to the impact relating to the Covid-19 pandemic (20 mins)

The Committee considered a report, set out in agenda pages 5 to 14, which outlined the initial impacts to Wokingham Borough Council’s (WBC’s) property investment group as a result of the Covid-19 (C-19) pandemic.

The report outlined the basis for the Property Investment Group (PIG), including the origins of the group and decision making process. The report stated that the commercial investment fund represented about half of the Council’s overall property business. Historically the Council’s property exposure had been relatively modest compared to many other local authorities but it had grown significantly in the last 5 yearsthrough delivery of our Regeneration and Commercialisation agendas.The Commercial Property Team was currently responsible for managing approximately£8.0m p.a. rental income split across the three key portfolios: Regeneration, Operationaland Investment.

Around 75% of investments (approximately £3.3m per annum) were secured against institutional calibre tenants who were thriving at present. With all debt taken into account, WBC would see approximately a £400k per annum profit based only on institutional calibre tenants when secure debt was subtracted from the overall figures. Any surplus was used to fund other Council services. WBC’s approach was validated by reputable external agencies who looked at assets and performance. WBC only invested for the long term, and the situation as presented within the report would only get better with the current holdings, as debt would reduce towards 0 over a 40 year investment period.

The PIG focussed on prudent investments, with tenants such as supermarkets. There was a targeted return of 5% on 1000 homes built by WBC over a 5 year period. This was an example of how the PIG could be used to regenerate parts of the Borough in a positive way, whilst allowing for a financial return to fund other Council services.

John Kaiser (Executive Member for Finance and Housing), Graham Ebers (Deputy Chief Executive), Bernie Pich (Assistant Director – Strategic Property and Commercial Assets), and Damon Emes (Head of Investments) attended the meeting to answer Member queries.

During the ensuing discussions, Members raised the following points and queries:

·           Were smaller, independent units within the Wokingham Town centre covering the interest on the investment debt with their rents? In addition, how many units had to become vacant for the loan interest to no longer be covered by rental income? Officer response – At present, the rental income was covering the interest on the loans. It was felt that Wokingham deserved to be different with a variety of smaller firms within the town centre. Many other areas had an abundance of units, and Wokingham was currently bucking the trend in terms of vacant units. Specific information regarding vacancy rates and rental returns would be circulated to the Committee after the meeting.

·           What was balance of the Council’s rental income from the three different portfolios? Officer response received after the meeting –

WBC Commercial Property rental income (£p.a.) by portfolio, September 2020

Investment      £4.6m  50%

Regeneration  £2.9m  32%

Estates            £1.7m  18%

TOTAL             £9.2m  100%

Note: the report to O&S Committee included a figure of approx. £8.0m taken from the Council’s Covid Rent policy document published March 2020. Since then the Investment portfolio has added one new asset with 6 new income streams, the Regen team has completed a number of new agreements/leases and the Estates team has continued to actively manage multiple income streams across four trading estates. The picture is constantly moving, in the right direction.

·           Had WBC purchased, or were in the process of trying to purchase, any additional commercial units? Officer response – This was a commercially sensitive area, however officers were always looking to discharge the work of the policy.

·           Was the food store property referred to on agenda page 8 classed as an institutional level client? Officer response – Careful covenant checks had been carried out, and in this instance the client had sold a variety of properties and leased them back to inject liquidity into the business.

·           £85m had been invested to date, when would the remaining money likely be invested? Officer response – Officers were not under compulsion to commit further funds at any particular time, and the underlying Council policy was to enhance the Council’s income stream.

·           Was there any concern with regards to the uncertainty of the property market? Officer response – This was a complex area, and the circumstance of each business was taken into account on an individual basis.

·           Were there any concerns regarding turnover based businesses providing rent? Officer response – Only one turnover based business was within the scheme, and this was the WBC owned Denmark Street car park. Although this was performing poorly at the moment, it was hoped that this would pick up in future.

·           How many leases were at risk at present? Officer response – There were a number of portions of income streams of tenants under leases. The focus was on supporting tenants throughout this difficult period through to the other side.

·           Was the scheme formed of investments that could withstand these difficult times? Officer response – In the context of the wider economy, the PIG and its investments were in a solid position, and officers were currently pleased and in a position to keep making positive forward steps.

·           To what extent were retail units expected to sustain rents of pre C-29 levels? Officer response – High street units were key areas of concern, however people still wanted physical interaction with certain products and there was a place for these retailers post C-19.

·           To what extent was increased Government interest in Local Authority investments a concern for WBC? Officer response – It was fair to say that the Government had a heightened interest in Local Authorities commercial investment schemes, as some Local Authorities had practiced a more extreme approach towards their investments. WBC practiced a safe and prudent approach towards our investments, and WBC were most certainly at the prudent end of all Local Authorities who were commercially investing. Most recently the Government had stipulated that you could not borrow outside of your boundaries. WBC were already borrowing using our own money, and there was not an intention to invest outside of the Borough in future. Investing within the Borough boundaries allowed WBC more control, and allowed development of schemes such as affordable housing for our residents.

·           What was the debt recovery strategy for tenants who were not currently paying? Officer response – During the pandemic, it became unlawful for landlords to use conventional recourses to get tenants to pay their rent. This had severely reduced the powers WBC had to encourage tenants to pay rent. The current approach involved creating and maintaining positive relationships with our tenants, whilst constantly assessing the risks. Currently, over 80% of rental collection was still being maintained.

·           Could more detail be provided regarding the term “flight to quality”? Officer response – This term referred to investors moving towards food stores and logistics companies as very popular investments. These industries were at the core of WBC’s portfolio and this could be seen as a positive benefit at present.

·           Should loan interest rates be increased, what effect would this have on WBC? Officer response – The public works loan board had increased rates by 1% overnight, however it was probable that in the long term the interest rates would go down. WBC were in a flexible position by having access to multiple sources of funding, in addition to our own internal funds.

RESOLVED That:

1)     John Kaiser, Graham Ebers, Bernie Pich, and Damon Emes be thanked for attending the Committee;

2)     Information regarding the balance of the Council’s rental income from the three different portfolios, and information regarding the regeneration income to debt query be included in the minutes;

3)     The report, questions, and responses be used within the Overview and Scrutiny Management Committee’s overall report on WBC’s initial response to the C-19 pandemic.