Wyre Forest District Council is continuing to invest in property as a way of raising vital income to fund local services.
Like many councils across the UK, the council must find new ways of raising money to offset the impact of reduced Government grants, become financially self-sufficient and avoid cutting services that are important to the public.
The council is looking to help plug its projected £1.6million funding gap by taking advantage of low-cost borrowing from the Government (via its Public Works Loans Board) at preferential rates that are not available to commercial investors.
This borrowed money can then be used to purchase property, including commercial, industrial, housing, retail and leisure, to generate new income streams for the council. The council collects the rents from these properties and then, once borrowing costs are taken off, the surplus income helps pay for council services.
There are rules about where councils can make property purchases particularly when using borrowing to fund. In Wyre Forest the geographical area extends beyond the district boundary to include the footprint of the Birmingham and Solihull and Worcestershire Local Enterprise Partnerships (LEPs). All acquisitions have to show a benefit to people who live in Wyre Forest or work within the footprint of the LEPs and are not purchased purely for commercial gain, but the income is of itself in part a clear financial benefit to residents.
This innovative approach has seen the council build on its existing property portfolio by creating a Capital Portfolio Fund to acquire two office blocks, one in Solihull and one in Bromsgrove, as well as shop units in Kidderminster over recent months raising circa £180,000 of new income each year after deducting all costs. The relatively modest returns reflect the low risk approach taken to protect the council’s future position and the fact that we do not have our own working capital to invest, being reliant on 100% borrowing.
More acquisitions will be announced in the coming weeks and months once transactions are finalised, generating even more money for local services.
Council Leader Councillor Marcus Hart said: “With the Government’s revenue support grant disappearing we must find new ways to fund local services for residents.
“We firmly believe this proactive and ambitious approach to raising income will help protect local services. We are taking advantage of borrowing cheaply to invest in property. We get immediate income from rents and once we have paid off the loan we then own the asset. It is the same as paying for a house with a mortgage, but on a much larger scale.
“I am certain residents would much prefer that we grow our income from sound commercial investments as opposed to constantly increasing council tax to the maximum or alternatively cutting very important and well regarded services.”
Cabinet Member for Resources Councillor Nathan Desmond said: “All of our investments are carefully considered beforehand. We would only proceed with a purchase if, after taking independent expert financial and professional advice, a guaranteed income can be demonstrated once the cost of borrowing is taken into account.
“We will not take unnecessary risks with our property portfolio. That is why the council has agreed a list of criteria, such as investing in a range of property types and spreading the investment across the geographical area of our Local Enterprise Partnerships.
“This gives us the added bonus of acquiring properties that are simply not available in Wyre Forest – our recent acquisition in Solihull is ideally situated close to motorways and next to HS2 and offers great potential that will directly benefit residents in the district.
“We are in the process of purchasing/developing a number of properties within Wyre Forest to add to our portfolio and we are actively seeking an opportunity to acquire residential premises within the district.
“We have developed an extremely careful and robust process for independently evaluating and challenging potential investments. An in-depth business case for all potential purchases must demonstrate a clear return on investment as well as multiple benefits for residents in Wyre Forest.
“This process also includes future-proofing our investments against changes that might impact in the long term, and considering alternative uses should markets change – consideration of risk is a key part of each business case decision.
“Once officers have completed their investigations, proposals are closely examined by the cross-party Overview and Scrutiny Committee before a final decision is made by members of the Cabinet. The Investment Strategy was fully approved by the council.”
There is more information about the council’s Capital Portfolio Fund here.
Further information is also available in Appendix 7.1 from the Cabinet Agenda from March 2018.