Agenda item

Report of the Cabinet Member Finance

 The Cabinet Member Finance introduced the report and stated that, as some Members were aware, an approach to this council about the possible acquisition of the Sainsbury’s supermarket off Priors Road had been made two weeks ago. Following the briefing Cabinet received and its approval to officers to investigate further, she was now seeking Council’s approval to make a budget allocation based on the business case and supporting information.

She explained that many councils were facing a tough and complex set of pressures – funding cuts, rising demand for services with increased costs associated with its provision and economic growth challenges. Further spending cuts were inevitable and likely to be in the next two months with the Local Government settlement and the decision on new homes bonus.

Demographic and economic pressures on authorities and their services were increasing so the question was how could local authorities transform themselves to respond to the pressures they faced. The current thinking of Government was to make councils become less reliant on Revenue Support Grant and other centrally controlled grant funding.  It was, therefore, this Cabinet’s aspiration to become financially sustainable by 2021-2022. This was one of the reasons why she had requested the Chief Finance Officer to write a commercial strategy that would be submitted to Cabinet the following day for approval.

Many councils were facing an increasing need for reinvestment in resources and services, ranging from community cohesion, health and social care to education and infrastructure. The status quo would only lead to service reduction. Councils would need to have a relentless focus on generating additional sources of revenue income as government grant continued to fall and interest rates remained low. The Cabinet Member believed that the focus, where market conditions allowed, should be on areas such as investments in the commercial property portfolio and regeneration through both direct and indirect investment to boost local economic activity.

She highlighted to Members that the property under discussion was not on the market and therefore an offer to buy needed to be of interest to the owners. With any property investment the need to assess the options and criteria was paramount and the financial objective and revenue delivery of this potential acquisition had been assessed and met the prescribed target yield expectations of circa 5%. The tenant had a strong covenant and it was a fairly modern property with a full repairing lease. The location was prime for this retail sector and was single let which avoided intensive management costs.  Alternative uses in the event of tenant failure had been evaluated. Prudent debt repayment provision had also been allowed for. The acquisition had been modelled to be funded through borrowing which would deliver in excess of £150k per year additional income towards the funding gap and this would be new income. It would not be appropriate to define a % return on investment. However the Cabinet Member confirmed that if the acquisition was to be part funded via the council’s own equity, the return would be significant as the rental stream would more than cover the principal and interest repayments and was guaranteed for a further 20.5 years.

The Cabinet Member then addressed the issue of risk stating that risk was not the same as uncertainty. Risk was a logical probability function whereas uncertainty was anything but. She said that those councils who adopted a more commercial approach would need to identify assumptions and risks. The risks associated with the proposed acquisition had been identified and scored appropriately but she questioned what the alternative to those risks would be which would in essence be cuts to services the public relied on. The Chief Finance Officer had also questioned whether the council could afford not to take the risks of commercial decisions.

In conclusion the Cabinet Member believed that commercialisation was the route to maintain and enhance service delivery. An appetite for risk was therefore needed whilst understanding and assessing those risks. Diversification and due diligence would be key to success. She said that the balance of probability of this decision was that it would not end in failure although whilst this would be a learning opportunity the risk of failure with public money should be considered carefully

Finally she highlighted that there was a way to go with this potential purchase and as with any commercial acquisition there was a need to move swiftly which was not always possible within local authority rules. She thus requested Council to put the authority in the best possible place to act swiftly with the best interests of Cheltenham’s residents at heart and the services they rightly expected.

The following questions were raised and responses given :

• A Member stated that as this was not a direct approach from the current holders this would attract a worse rate than if the owners were seeking to sell. He then asked whether the Cabinet and officers had assessed other opportunities in Cheltenham which would attract an income of more than 5 %. In response the Cabinet Member explained that there had been other opportunities in recent weeks and bids had been placed. However, it appeared that the properties had sold for 20 % over the asking price. She highlighted that the purchase of Delta House had been an off market deal and if the council was to become more commercial this way of acquiring property would be available to it to consider. She went on to explain that an agent had made a speculative approach to the council. The Member insisted that if this was a third party not related to the council or the owners of the property this effectively meant that the council was approaching the owners. He felt that if properties in Cheltenham were selling for 20 % above the market value then the market value was wrong or that Cheltenham should not be the council’s focus. He asked whether there were other projects the council could consider which could also constitute an investment with social benefits. The Cabinet Member confirmed that the Council had in the investment policy committed to invest within the borough. As a result of the autumn statement it was likely that local authorities would no longer be able to invest outside the borough.
• In response to a question on what experience the council had in investing significant sums in one property the Cabinet Member referred to the purchase of Delta Place. The Cabinet Member also highlighted the fact that on 12 December Cabinet would consider the Property Portfolio Asset Review which contained details of all the Councils investment property.
• The Cabinet Member confirmed that 5 % would be the net yield from acquiring the property.
• Whilst some Members welcomed the new commercial approach of the council in terms of innovative ways of investing they questioned whether the risks with the tenant Sainsburys had been fully explored, for example was there any possiblility that Sainsburys would invoke the break clause and had officers discussed with Sainsburys their current and future plans and their trading figures. In response the Cabinet Member highlighted that at the break clause point Sainsburys would either exit or renegotiate the rent which. She highlighted that the Sainsburys on Priors Road was the only supermarket that side of town and was in fact a large convenience store. She noted that supermarkets were generally no longer building large superstores.
• The Chief Finance Officer highlighted that the property in terms of yield was 5 % and the approx. £150k per annum would make a valuable contribution to the Medium Term Financial Strategy.
• The freeholder’s agent had contacted the council as he was aware the council was looking to invest in the town.
• Many Members welcomed the proposal and felt that the return was over and above what the council was currently realising. In addition the freehold acquisition of the property was of value.
• In response to a question on comparing the potential return on this potential acquisition to that which was currently being realised from Delta Place the Chief Finance Officer highlighted that Delta Place had been purchased a number of years ago and since then the market had changed somewhat as too had the council’s appetite for investment. The net yield on Delta Place was 9% and the purchase had different financing arrangements as it had been funded by a mix of £2.5m capital receipts and £6m internal borrowing compared to the proposed funding for this acquisition via the PWLB. Therefore this potential purchase could not be compared with Delta Place.
• In response to a question as to what the return on investing £20 million in council houses would provide the Cabinet Member Finance responded that councils were not permitted to invest in housing.

In the debate that ensued Members made the following points :

• Members paid tribute to the sound advice they felt they received from their professional officers who had demonstrated themselves to be prudent in the way they handled the council’s finances. They acknowledged that risks and brave decisions had to be made to invest in property in order to secure an income for the council. The alternative would be a managed decline in services.
• Members remarked that it was shocking that it was permissible for local authorities to make retail investment yet they were disallowed from building houses.
• Due to the location of the site should Sainsburys exit Members acknowledged that the council would still have its capital value which would represent a valuable strategic site. But in general they felt that it was more likely that if the store did exit it would be replaced by another supermarket operator as there was no competition in the area which was surrounded by high density housing.
• Members acknowledged that this was an opportunity to make a sensible investment with potentially good returns.
• Brave decisions had been made by this council in the past which was reflected in its property portfolio.
• This would be a good deal for the town and a welcome challenge. It was important to put Cheltenham first and safeguard the future of the town.
• A Member requested that officers talk further to professionals of the supermarket business as some concern was expressed that the supermarket business would change over the next 10 years with more home delivery due to a change in shopping trends. There could also be some consolidation of the industry. There should therefore be further careful due diligence.
• Some Members remarked that there was a need to understand further the size and type of risk involved with this acquisition. 
• A Member felt there was a lack of proper understanding about the decision, he had received no extra reassurances and thus felt very uncomfortable supporting the proposed acquisition.

In response to comments the Chief Finance Officer assured Members that professional officers had scored the risks and Appendix 5 provided Members with the detail and the due diligence and background in terms of what supermarkets were being sold for elsewhere. He gave examples of other local authorities who had made significant capital investments - Spelthorne BC had invested £350m in a BP Plant, Warrington BC had bought a shopping centre for £200m. He said that there would have to be further appetite for risk further ahead in order to manage the absence of government grant from 2019/2020. Alternative sources of income needed to be found or the services provided by the council would have to be reviewed. He believed that the risks had been scored correctly and believed there was low risk that Sainsburys would exit the site based on the location and the trading figures for that particular store.

The Cabinet Member Finance made reference to the point raised on the increase in online shopping and referred to Appendix 5 and the 2016 research by Morgan Stanley which established varying reasons why people did not buy their groceries online.

Finally, the Cabinet Member Finance said she had confidence in the officer risk scoring and believed that the council should embrace this opportunity which would reflect the future direction of travel of this authority.

Upon 7 members standing in seat a recorded vote was required and this was CARRIED

RESOLVED THAT (23 in favour, 2 against, 2 abstentions)

A budget allocation of £22m be made, to be funded via prudential borrowing via the Public Works Loan Board (PWLB), for the purchase of the freehold interest of Sainsbury’s Priors Road, Cheltenham and all associated costs.

Voting For 23: Councillors Baker, Britter, Clucas, Coleman, Fisher, Harman,  Harvey, C Hay, R Hay, Hegenbarth, Jeffries, Jordan, Mason, H McCloskey, P McCloskey, Payne, Seacome, Stennett, Sudbury, Thornton, Walklett, Wheeler, Willingham

 Against 2: Councillors Babbage, Lillywhite.

 Abstentions 2: Bickerton, Nelson