Spelthorne BC has seen more than £100m wiped off the value of its commercial property portfolio over a three year period, with its out of borough investments hit hardest.
Spelthorne borrowed £1.018bn from the Public Works Loan Board between 2016 and 2018, £953m of which was for commercial property, and has seen the valuation of those assets fall £101m to £916m.
Furthermore, Spelthorne’s external auditors have still not delivered a value for money opinion on it’s 2017-18 accounts covering the period when all of its out of borough investments were made, which is causing a hold up in the auditing of its accounts for the years since.
Spelthorne said the assets are delivering a £10m net surplus each year, and more than 90% is currently let to tenants.
Spelthorne’s out of borough investments
LGC analysis shows its six out of borough investments – bought specifically with the intention of making yield – have fared worst, plunging in value by £70m from £560m to £490m in the five years to 2022.
All six of these investments are in commercial office space. They include:
- Charter Building in Hillingdon, once the UK headquarters for Coca Cola, which has dropped in value by £37m from £136m to £99m
- Porter Building in Slough which has fallen by £9m from £66m to £57m
- Thames Tower in Reading which has decreased in value £9m from £119m to £110
Since 2018 Spelthorne has stopped purchasing investment properties, and its focus is on delivery housing and regeneration within the borough.
Long-term uncertainty over BP campus
Spelthorne’s biggest investment was a sale and leaseback deal for BP’s main campus in its own patch, which has increased in value from £385m to £387m. Spelthorne made the investment in Sunbury in 2016 using a series of loans from the Public Works Loan Board to be paid back over a 50-year period.
The council says taking 50 loans out rather than one single loan saved it a “significant amount of money”.
But BP only took out a 20-year lease on the building and has plans in place to reduce its office footprint in the UK. The company sold its current London headquarters on St James’s Square in 2020 to move to a “smaller and more sustainable location”.
BP did not comment when asked by LGC whether it has plans to renew its Sunbury lease in 2036, but Spelthorne is already considering alternative uses for the building in the event BP does leave.
A recent council report said it “considered that a number of likely alternative uses were highly probable – use as another business park with one or more tenants; redevelopment as housing or a use related to the near-by airport”.
Spelthorne is also setting aside a slice of the rental income each year to build up sinking fund reserves, now worth £33m, to cover future dips in income when leases come to an end or are broken. The council is currently conducting a review of its sinking funds strategy and reserves over the next 50 years, to build resilience to “unexpected fluctuations in the rental market”.
External audit ‘considerably overdue’
Spelthorne is still awaiting its former external auditor’s value for money opinion on its 2017-18 accounts, covering the period when its out of borough investments were made. Council papers raise concerns that these accounts are now “considerably overdue”, despite the council “responding to all of KPMG’s questions and providing all the information they requested” and having held “numerous meetings” with them.
Throughout 2021-22 a working group including Spelthorne’s leader John Boughtflower (Con) and chair of its audit committee liaised with KPMG to try to resolve the matter, amid concerns there had been no comprehensive audit trail to explain how key investment decisions were agreed during the previous Tory administration’s spending spree.
Until KPMG completes its value for money opinion, Spelthorne cannot publish its final audited accounts for all the years since then.
Concerns have also been raised related to internal auditing. Spelthorne’s internal audit manager Punita Talwar reported on twelve assurance reviews relating to the 2021-22 audit plan, of which ten were assessed as requiring ‘some improvement’, one was identified as ‘major improvement needed’, and one was assessed as ‘effective’.
£17m spent on consultants
The small Surrey council spent £17m on 68 different consultants in the five years between 2016-17 and 2021-22, including more than £8.3m spent with Cushman & Wakefield, the council’s primary real estate adviser. It spent the most – almost £5m – in 2019-20, and £1.4m in 2021-22.
Councils are facing increasing scrutiny over their engagement with consultants. Earlier this month, communities secretary Greg Clark hit out at councils that were looking for “strategies that push at the bounds of what is permitted, and sometimes seek external advice and support to implement novel and risky strategies”.
Council: Valuations only relevant when owner seeks to sell
A council spokesperson described the £100m depreciation in the value of Spelthorne’s investments as “purely an accounting adjustment” with “no impact on the council’s cash balances, useable reserves, revenue budget or our ability to provide services for our residents”.
“Valuations are only relevant at the point an owner seeks to sell an asset, and Spelthorne is looking to be a long term holder of these assets,” they said.
The spokesperson also said in percentage terms, the reductions in Spelthorne’s valuations since the pandemic is “broadly in line with the sector as a whole”.
Currently just over 92% of Spelthorne’s investment assets portfolio is let to tenants, which they claimed was above the national average. The spokesperson also pointed out that Spelthorne collected 100% of investment portfolio rent invoiced for 2020-21 and 99.98% for 2021-22 – “despite the worst economic recession for more than 300 years”.
They continued: “After paying interest, making annual debt repayments covering management costs of the assets, and setting aside a slice of the rental income each year to build up sinking fund reserves…the assets are still delivering approximately £10m net surplus per annum to support the council’s provision of services to residents and to help drive its delivery of affordable housing for residents.”