Property investment solution for East Herts Council's budget woes
Four homes in Bishop's Stortford will form the foundation of a property investment company set up East Herts District Council to help keep its cash safe as houses. The proposals were approved by the authority's top brass at a meeting of the executive and must be ratified by the full council before the deal to set up Millstream Property Investments Limited can go ahead, but the cabinet was convinced it can generate much-needed income in the future.
The homes in question in Bishop’s Stortford are Castle Bungalow in Castle Gardens and 1, 2 and 3 Old River Lane. The latter three were once part of the ill-fated plans for a £105m retail, restaurant and residential complex, planned by Henderson Global Investors.
In 2010, East Herts was accused of selling its town centre assets at the Causeway, worth £9.9m, for a knockdown price of £6.25m.
In 2015, the district council spent £19.55m buying back Henderson’s enhanced holdings: Charringtons House office block; the Causeway car park and Waitrose car parks; the Causeway offices which have now been demolished; and 1, 2 and 3 Old River Lane – three houses with tenants.
Then the council argued that deal made sense because rents and other incomes meant the site could generate a return on the investment of five to six per cent.
The three homes plus Castle Bungalow in Castle Gardens and 6 Water Lane in Hertford will build on that principle as part of a private rental project.
A report to the executive said: “East Herts Council, like many local authorities, is facing reductions in subsidy and grants from central government and so is finding it increasingly challenging to fund both existing services and emerging priorities.
“The Medium Term Financial Plan (MTFP) has highlighted: Revenue Support Grant funding from central government reduces from £1,145k in 2016/17 to £351k in 2017/18 and then reduces to zero from 2018/19.
“This is a significant loss in funding within the MTFP. There is no long-term certainty over the future of New Homes Bonus and already New Homes Bonus reforms have reduced the amount of grant received.
“The Department for Communities and Local Government (DCLG) includes in their assumptions that council tax will be increased by at least the referendum limit amount, £5 for East Herts Council, each year until 2019/20. The proposed move to 100 per cent business rates retention will place additional risk to the future funding of local government from 2019/20.”
The warning from the cabinet’s advisors was stark: “It is imperative that the council acts to secure other sources of income in the longer term to prepare for potential further reductions in these sources of funding. To this end, the council has already made a number of investment decisions with the aim of securing a revenue return on assets held.
“The council’s investment priorities are security first, liquidity second, then return. The aim is to avoid a concentration of risk.”
It’s property plans have already been scrutinised by property and investment advice consultants from Savills and they have concluded: “The [council’s] overall approach and business plan model is similar to those which we have seen at other local authorities. We have reviewed the workings of the business plan model, and successfully carried out sense checks, largely by mirroring the results in our own model.”
The council will loan the new company the money to buy the properties at market value, in line with State Aid regulations and the interest rate paid will offer a better return than cash held on deposit and/or the council’s own cost of borrowing. The company will generate income from rents and uplift in the capital value of its assets and these profits will be distributed to the shareholder - namely the council - and used for possible reinvestment in further residential and even commercial properties.