Agenda item

Report by the Chief Operating Officer

12.1     The Chief Property Officer introduced the report and presentation.

12.2     The Committee discussed a variety of issues, which are summarised below.

Balanced portfolio

12.3     The Committee queried the means by which a balanced portfolio would be achieved, and asked about the assumptions on risk and reward underpinning the report.  The Chief Property Officer responded that a range of options would be considered, from existing assets providing a proven rental income stream, to development sites.  He confirmed that the market for low risk opportunities was tightening, which may restrict the choices available to ESCC as other authorities explore investment strategies.      

12.4     The Chief Property Officer set out that the Strategy was predicated on the basis of providing an income stream, and not on capital growth.  The Committee remarked that the property market is subject to cycles, and that, in particular, the commercial sector is volatile.  The Committee requested clarity on the criteria for stress testing any investment opportunity, and the effect of the Council entering the market.

12.5     The Chief Operating Officer reiterated that the Strategy was being developed to provide a mechanism by which the Council could derive income to support services, should the Council want to pursue this.   

12.6     The Chief Property Officer clarified that development of the details was the next piece of work by the Orbis partnership.  This would include stress tests, checking assets for patterns of liquidation of tenant firms, empty units and void periods.  Other criteria looked at would be location, a systematic check of the property and how it fits into the overall portfolio.  He set out that advice would be sought throughout the life of the asset, with regular check-ups. 

Supporting priorities

12.7     The Committee expressed support for investing in development that also supported the Council’s corporate priorities, and cited development of health-related facilities as an example.   The Committee also supported investment to support driving sustainable economic growth.  The Chief Operating Officer set out that discussions had been taking place with Health bodies, but that these had initially proved unfruitful. 

12.8     Councillor Smith provided the example of Aylesbury Vale District Council as holding assets unconnected with corporate priorities.  The Chief Operating Officer set out that the East Sussex property economy is not sufficiently developed to support a Strategy based solely within the County, presenting a high risk and low return.  

12.9     The Committee remarked on the need for clear communications on any strategy, to avoid a situation like the Icelandic banking crisis which affected individual local authorities’ finances.  The Committee felt that investment outside of the county may be harder to justify to the electorate, whereas a clear link to priorities would mitigate that concern. 

Borrowing and effect on ESCC Finances

12.10   The Chief Property Officer set out that the majority of the investment strategy would be financed by borrowing, principally from the Public Works Loans Board, as the Council does not have a large asset base.  The Chief Finance Officer confirmed that repayments would be at a fixed rate, repaying interest and the principal sum, in accordance with the agreed Treasury Management Strategy.  

12.11   Councillor Barnes reported that Rother District Council was investing in a Churches and Charities Trust, returning 4%.  The Chief Operating Officer confirmed that the County Council was permitted to borrow money to purchase assets, but not to support speculative investment.

12.12   The Committee requested clarity on the level of exposure the Strategy envisaged.  In particular, the Committee requested information in future proposals on the proportion of the Council’s liabilities that will be tied to assets exposed to the commercial property market. The Chief Property Officer set out that the proposal was a 1-2% return on a fund of £150m.  It was confirmed that the proposal was not to meet the Council’s funding requirement, but to provide additional income without detracting from core services. 

12.13   The Committee expressed concern about the potential exposure to contingent liabilities should the property market behave in a way detrimental to the Council’s interests, and the appropriate methods for accounting for such risks. 

Governance

12.14   The Committee requested details of the standards of due diligence that would be undertaken, and who would be accountable.  The Chief Property Officer highlighted the different approaches required by the different statutory underpinning of any acquisitions.  All investment decisions would be subject to approval of the business case by the Chief Finance Officer, in his role as Section 151 Officer, that the investment represented prudential borrowing. He would be assisted in this by advice from Internal Audit in reviewing the governance process and the Treasury Management team. 

12.15   The Chief Operating Officer remarked that the current Treasury Management Strategy could be reviewed, including attitudes to the current priority order of Security, Liquidity and Return.

12.16   The Chief Operating Officer confirmed that the Committee’s discussion was part of the process of developing the Strategy, which would be for the Executive to decide to implement or not.  Further input would be sought from external advisors and further exploration would be welcomed. He recognised that the Committee supported in-County investment where it assisted the Council’s priorities, and the reservations of the Committee on borrowing for investment, and the effect of any such borrowing on the Council’s finances.  

12.17   The Committee RESOLVED to recommend that further work should be undertaken in developing a more detailed strategy, with particular reference to funding sources and the development of clear criteria for effective due diligence, and the effect of borrowing on the balance sheet.