Spelthorne council leader reveals ‘nerves’ about London office deals

Ian Harvey says a number of factors made him back off from Cheapside and Vauxhall office investments, while discussing wider plans for the council’s property empire. Spelthorne Borough Council is looking at converting a portion of its Surrey headquarters into flats. Having spent nearly £1bn on commercial property in less than three years, the local authority is moving quickly on to building a residential portfolio, starting with assets it already owns. It marks something of an inwards retreat given it considered entering the world’s most competitive property market earlier this year. The council, based in Staines, was tempted by Aberdeen Standard Investment’s 100 Cheapside, EC2, and Ballymore’s One Embassy Gardens in Vauxhall, SW8, but the sums did not add up, according to council leader Ian Harvey. Close look “We looked at 100 Cheapside and the one opposite the US embassy quite closely and there are a number of reasons we decided not to pursue those,” Harvey says. “It’s not the case, as some people suggested, that we walked out on the day of exchange. “Interest rates were becoming more volatile plus the actual net margin that we work on is ultimately extremely slim. Both sellers were seeking a high purchase price against the yield which squeezed that even further and in the case of Cheapside, when I became aware that in fact we weren’t buying a freehold and only a long leasehold was available I got even more nervous.” The Cheapside opportunity, comprising 100,000 sq ft in office space, was put on the market for £136m, reflecting a yield of 4.25%, in November. One Embassy Gardens, a 156,000 sq ft office building, has been on the market since October for around £160m. DWS is now understood to be in talks to buy it. Council property empire Spelthorne has taken advantage of cheap loans from the Public Works Loan Board (PWLB), an agency of the Treasury, to boost its income following cuts in government funding. Some councils have followed suit, though not to the same scale, but critics say Spelthorne could be badly exposed during market downturns. Harvey works closely with Howard Williams, Spelthorne’s cabinet member for finance. The pair have built up the council’s property empire since Harvey became council leader in 2016, drawing on counsel from a range of external advisers including Cushman & Wakefield. Both have property backgrounds. Harvey used to be an investment mortgage broker while Williams gained experience in the sector through working in commercial finance. “It seemed an obvious thing for Spelthorne to do,” says Harvey. “We had the opportunity to buy the BP site which gave us a good kick off and we’ve taken it from there.” Cutting red tape Spelthorne acquired BP’s business campus in Sunbury-On-Thames (pictured, above) in 2016 for £360m, and it remains the council’s largest single property deal to-date. Since 2016, the council has moved from having a deficit of £2m to bringing in income of around £10m, roughly half of its overall budget. Spelthorne has not ruled out making further commercial property investments. In fact, it already has council approval to borrow a further £500m from the PWLB. Williams explains: “The reason we have such a large buffer is when the BP option came up the council had only agreed we could borrow up to £40m. We had to go to them and say we’ve signed a non-disclosure agreement, trust us, please can we take our limit from £40m to £400m. “To be fair, every single councillor agreed, including the opposition. They all put their trust in us.” Williams adds that cutting the red tape was critical. “This was important because our competitors were saying, “It’s a local authority, it will take them a long time’. In reality we had lined up all of our ducks by the time we sat down and talked to BP.” For the time being, though, the council is comfortable with its commercial property portfolio. In total, around 60% of its investments so far have been outside of its own borough. “If you look at a map of where our properties are, the furthest west is in Reading then the rest are in Slough, Heathrow, Uxbridge, Spelthorne and the furthest east is in Hammersmith. It is all quite tightly arranged,” says Harvey. Williams adds: “A lot of our working population depend on Heathrow so it’s a big influence. There is a natural tendency for councils to do everything in their borough but that is misleading because without Heathrow the borough would be very quiet economically, so we look at Heathrow and where people commute in from and base their offices.” Attracting criticism However, the council’s buying spree has triggered criticism, with one Labour Spelthorne councillor, Robert Evans, telling the Bureau of Investigative Journalism in December: “People in Spelthorne ought to be worried about this because it’s mortgaging the services they rely on”. The Chartered Institute of Public Finance and Accountancy (Cipfa) has warned councils not to expose public funds to “unnecessary or unquantified risk” when borrowing to invest in commercial property. “Where the scale of commercial investments including property are not proportionate to the resources of the authority, this is unlikely to be consistent with the requirements of [the Cipfa prudential code],” it said. Harvey argues that the council’s investment strategy has been “prudent”. He says: “Everything we have bought has been in good condition, and in most cases freshly refurbished. We are progressively building up a sinking fund which is about £11m at the moment, and within a couple of years will be £30m to provide for voids and refurbishments. We think we are doing the job properly.” Housebuilding outside HRA Spelthorne now plans to invest in housebuilding through its own local housing company Knowle Green Estates. Harvey says: “We need to borrow for the capital side, but we don’t want to build nice houses and end up with people asking to purchase them through Right to Buy.” Local housing companies sit outside of the local government housing financing system, the Housing Revenue Account (HRA). As a result, they are exempt from most affordable housing regulations such as Right to Buy, which helps council house tenants buy their rented homes. Knowle Green Estates will deliver 20% of the borough’s housing need in the next five years, roughly 600 units. The council is aiming to ensure 40% of all new housing in the borough is affordable. Spelthorne previously sold off the bulk of its council housing in the 1990s. It offloaded roughly 3,300 council houses to a social housing provider for just over £50m. “It is not hard to work out that that wasn’t a very good idea,” says Harvey. The council may consider a joint venture partner further down the line, he adds. “We are in the process of converting some of our sites into residential schemes. We would like to do as much in-house as we can to claim as much profit as possible.” With Spelthorne councillors up for re-election in May, the pair have likely chosen a wise time to focus on building their constituents new homes. As Williams remarks: “A lot of people who live here work at Heathrow. Not just the chief executives, baggage handlers as well. House prices have shot up as many people migrate here from London. So, that’s what we’re contending with. This is not a massive ego trip – we are delivering what’s right for our people.”