Agenda item

Report of the Director of Property, Investment and Estates

The following witnesses have been invited to the meeting to assist members in their consideration of the issues:

Nicholas Gill – Director of Investment, Corporation of London

Simon Latham – Principal, Brook Investment Partners

6.1     The Committee received a report that outlined the Council’s Corporate Property Strategy and the current situation and aspirations for growth over the next five years.

6.2     The paper outlined the breadth of the Council’s property assets – the corporate portfolio, that is the real estate the Council occupies to provide its services, and the investment portfolio from which the Council generates revenue and to highlight the strategic approach to its management.

6.3     Guy Slocombe, Director of Property, Investment & Estates, provided a PowerPoint presentation highlighting the key issues.

6.4     The Committee heard from Nicholas Gill, Director of Investment, Corporation of London and Simon Latham, Principal, Brook Investment Partners, who had been invited to the meeting to assist the Committee in its deliberations.

6.5     At the Committee’s request Mr Gill summarised his professional experience.  He stated that he had worked in the property investment market for 35 years, 30 years of which had been in private practice.  Since October 2010 he had been employed by the Corporation of London as its Director of Investment managing £3 billion of property assets with an objective of maximising revenue and delivering performance. 

6.6     Mr Gill provided the following information about the Corporation of London’s investment portfolio:

·                  It was benchmarked by Investment Property Databank and was a top quartile performer over 20, 15, 10, 5 and 3 year terms. 

·                  Investment was only made in property located in central London; 60% of the portfolio was located in the city of London with 20% based in Westminster and the remainder in Tower Hamlets, Southwark, Camden and Islington. 

·                  The investment portfolio’s objective is to assist the Corporation in being the foremost global financial centre in the world.  The directorate also aims to utilise the portfolio to provide accommodation for the areas small and medium enterprises. 

·                  The portfolio was diversified consisting of 60% offices, 35% retail and 5% industrial. 

·                  The property management function consists of directly managed short term lets and other properties where the Corporation is a landlord and collects ground rent. 

·                  It has pools of available capital to reinvest in the portfolio.  In the last few years it has actively invested capital by undertaking major refurbishments to future proof properties.  This has included installing air conditioning, showers and bike facilities that office tenants are looking for. This has resulted in an increase in rental growth. 

·                  The investment portfolio has a five-year strategy which is reviewed annually.  Business plans are developed for each property and are examined forensically on a regular basis to ensure that the best outcomes are being achieved. 

·                  The investment and corporate property portfolios at the Corporation are managed by different people.  Similarly to the City Council, the Corporation was looking to reduce its corporate property footprint.

6.7     Simon Latham then summarised his property investment experience.  He had spent 30 years working in real estate, predominantly in the commercial sector.  17 years of this was spent working as a fund manager overseeing a portfolio with a value of £3.5 billion.  This consisted of collective investment schemes involving a multiplicity of fundholders.  The management of the schemes was predicated on two key objectives; i) using the best advice available at the appropriate price to ensure that assets were delivering to their full potential to meet the requirements of stakeholders and ii) constantly questioning how assets can be managed better.  In managing the portfolios consideration was given not just to increasing revenue and driving rents but also to understanding the requirements of tenants who in some cases had occupied premises for many years.  The portfolios were built by design and without the constraints of political considerations unlike some of the Council’s portfolio which has been inherited and is to some degree run passively.

6.8     The committee then considered the issues set out in the report and submitted questions to officers and witnesses.

6.9     Mr Gill was asked about the separate management arrangements of the corporate property and investment portfolios at the Corporation of London and whether he would recommend this arrangement to the City Council.  He explained that he worked in the City Surveyor’s Department where the senior management team included the City Surveyor, Corporate Property Director and Property Projects Director as well as himself.  All of the property was managed in-house which contrasted with Westminster whose investment portfolio is managed by external agent, Bilfinger GVA.  He considered that the management arrangements at the Corporation of London worked extremely well. 

6.10    Mr Slocombe informed members that the Council’s internal Corporate Property Service consists of different teams which have specific responsibilities similar to that at the Corporation of London. He advised that the management contract with Bilfinger GVA was very cost-effective and that it would likely be more expensive to undertake the work in-house given the number of property managers it would require to undertake all the duties associated with managing the investment property assets.

6.11    Mr Slocombe was asked about the criteria used to measure the value of a building.  He explained that every building within the investment portfolio is measured against a number of criteria, its lease term, location, condition and income. This will identify its capitalisation rate (or yield) which is multiplied against the revenue it generates and what it could generate on reversion.  The Council will wherever possible avoid selling assets however where there is a clear rationale for doing so it will go through the necessary governance processes.

6.12    The Committee asked Mr Slocombe whether the Council looks to improve the investment portfolio when disposing of an asset that is not delivering a competitive yield.  He stated that this was the case.  The Council’s Corporate Property Strategy is to restructure the investment portfolio incrementally.  This will include refurbishing office buildings to optimise revenue generation as well as ensuring the portfolio is sufficiently diversified so as not to be overexposed in any one area or location.  In response to a supplementary question about risk management he explained that the Corporate Property team work closely with the City Treasurer to manage risk and that contingency was built into business plans.  As a long-term asset holder the Council was able to withstand short term fluctuations in the market.

6.13    Reassurance was sought from Mr Slocombe that any review of retail parades which are secondary in nature (family run corner shops and hairdressing salons, for example) would be considered in the round.  He was informed that some of the tenants were struggling and an increase in rents would prove critical to their businesses viability.  Mr Slocombe explained that historically each shop within a parade had been considered individually.  He advised that in future retail parades would be considered holistically, though individual tenancies remain integral to a combined strategy. Fundamental to the Council’s property asset management strategy is a need to consider a range of factors including socio- economic factors. He advised that whilst secondary retail does not provide the prospect of high levels of revenue or capital growth it does provide a low risk from revenue void.  Some of the businesses had been run by generations of the same family providing a continuity of income to the Council as well as services to the local community and Westminster would not want to lose this.

6.14    The expert witnesses were asked how the Council could best pursue commercial development opportunities with private sector investors as equitable partners.  Members commented that there were various political and statutory obligations incumbent upon the Council which impacted upon and sometimes conflicted with the requirements and speed desired by private investors.  Mr Latham highlighted that the Council had a greater diversity of opportunities than other local authorities in that its assets were located in one of the most highly desirable and valuable geographical areas of the country where there was a finite amount of land.  He stated that there were a number of private sector bodies who were hugely experienced in the areas that the Council is looking to increase the value of its investment portfolio. For a fee the Council could enter into a joint venture structure.  Raising capital, pursuing compulsory purchase orders and meeting planning policy requirements were all in the Council’s control.  He considered the Council needed to be more transparent with equity partners about these processes which also needed to be streamlined to combat private sector concerns that a significant amount of time and effort would be involved for little gain.

6.15    Mr Slocombe was asked about the membership of the Property Investment Panel and whether there was room on the membership for a member of the minority party.  He explained that the councillors that sit on the panel (Councillors Tim Mitchell, Ian Rowley and Jean-Paul Floru) were selected as they have direct private sector experience in property portfolio investment or have responsibility as Cabinet Member, or Deputy, for Property.  He undertook to raise the matter with the Cabinet Member for Finance & Corporate Services.

6.16    The Committee asked whether the examples in the presentation around reducing the operational portfolio were based on intended projects.  Mr Slocombe clarified that they were illustrative.  Members commented that any proposals to co-locate other services within libraries would require extensive community consultation.  Mr Slocombe explained that every asset within the portfolio would be carefully reviewed.  The corporate property team was embarking on a very detailed analysis of how the operational portfolio was being used.  As an example he highlighted that some of the Council’s schools were not fully used and were largely empty after 3:30pm whereas other buildings close by might only be occupied by community groups for a couple of hours per day. There were opportunities to match users to assets in a much more productive manner.

6.17    Mr Slocombe was asked about the 10% of the investment portfolio that was let to voluntary & community services.  It was suggested to him that it might be preferable for those organisations that were funded by the Council to pay market level rents to determine which were viable.  Mr Slocombe explained that there were 35 voluntary and community services tenants.  Many of the tenancies were historic, gifted by the City Council some 40 to 50 years ago and would be expensive to take back.  Currently tenancies are awarded as part of a commissioning structure where the Council provides a grant and accommodation to an organisation that is providing a useful community service.  These tenancies are on more flexible terms than would be given to a commercial tenant.  However, if the commissioned service failed to deliver the structure could be reviewed.

6.18   RESOLVED:

1.     The Committee welcomed the witnesses’ observations and felt reassured that the Council’s decision to desist from funding its capital programme from asset sales is appropriate and that the organisation has the ability and professional expertise to manage its property investment portfolio.

2.     The committee agreed that the Council should use its General Fund land and property assets more effectively to grow income lines to support front line services.

3.     The committee noted the witnesses’ advice about how the Council can best pursue commercial development opportunities with private sector investors as equitable partners.

4.     The committee endorsed the aim of reducing costs and increasing revenue from the rationalisation of the operational portfolio in order to contribute to the Council’s budget arrangements.  It considered that in principle no asset should be exempt from review to ensure that all properties were being used to their maximum potential.  The review of some sites will require sensitivity and any proposal for change will need wide consultation due to the nature of the use(s).  However, it considered that it was important that the Council explores the use of its assets in line with its fiduciary duty to the council’s taxpayers.

5.     The Committee welcomed the establishment of the Property Investment Panel which provides expert advice to the Council on the investment portfolio which included, as part of its membership, external, professional Fund Managers, Dr Robin Goodchild of LaSalle Investment Management and Simon Latham of Brook Investment Partners.

ACTION: Advise whether a member of the minority party can join the membership of the Property Investment Panel (Councillor Tim Mitchell, Cabinet Member for Finance & Corporate Services).