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PFSC 16/05/2014
Appendix 1
Outline Plan to deliver the County Council’s investment property
Strategy
1.
Strategic Drivers
1.1
The County Council’s property investment strategy sets out how its
property team will manage investment in non-operational assets. It
is consistent with broader corporate and medium term financial
strategies. Its principal objectives are financial but it will also support
broader Council objectives around economic growth, area
regeneration, jobs and new housing where there are opportunities to
do so. Its principal area of investment will be West Sussex.
Council Finances
1.2
West Sussex County Council is facing a sustained reduction in
revenue funding from central government of over 20% from 2012/13
to 2015/16, with indications the trajectory will continue to 2020. The
Council faces savings of up to £141m in the four years to 2017/18.
This sustained pressure on revenue means it is increasingly
important for the County Council to find ways to generate income
locally, so it has greater control over its own future finances and to
protect vital local services. Property investment is a key means of
achieving this aim.
1.3
The County Council has historically disposed of surplus assets to
generate capital receipts and it maintains only a limited property
investment portfolio (income £0.400m in 2012/13). Looking ahead,
the Council is keen to expand the investment portfolio and generate
additional annual income by developing surplus County Council sites
and other acquired sites. Nevertheless, it must balance this objective
with the need to generate capital receipts to support the Council’s
capital programme as set out in the medium-term financial strategy,
which currently assumes disposals deliver receipts of £8m per annum
(approx. 8% of the programme funding for the period 2013-17). It
must also take into account the need to sustain capital funds to
invest in property development (£36 million currently set aside).
Corporate and Community Priorities
1.4
The County Council considers there to be scope for its property
investment strategy to support broader corporate and community
objectives in West Sussex relating to economic growth, employment
opportunities, housing provision and area regeneration. While these
factors are not the primary strategic drivers for the property
investment strategy, they will be taken account of each time the
Council examines an opportunity for site development.
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1.5
Economic Growth. Like all parts of the country, West Sussex is
aiming to deliver robust and sustainable economic growth, which will
improve its ability to retain the working-age population and attract
more skilled working age people to the area. In turn this will help
improve the demographic balance in the county to a higher ratio of
working-age residents. Property investment can support economic
growth by creating new employment floor space (eg building new
light industrial units) and by increasing spend in the local supply
chain.
1.6
Housing. Another key challenge in West Sussex is providing an
appropriate mix of housing supply. The Coastal West Sussex
Strategic Housing Market Assessment Update, which covers
Chichester, Worthing, Arun and Adur highlights the importance of
appropriate housing supply to attract and retain younger working age
persons through the provision of affordable and intermediate housing
options. By developing residential property, the Council can help to
address a key shortage in the current market.
1.7
Area Regeneration. Figures for West Sussex mask significant
variances across the county with areas of significantly lower average
earnings/deprivation levels in some districts of the county. The
property investment strategy can support area regeneration
objectives, particularly if development in areas is not commercially
attractive to private sector developers.
2.
Property Investment Objectives and Performance Indicators
2.1
On the basis of the strategic drivers, the following objectives are
expected to inform the property investment strategy:
Figure 2: Key objectives and associated performance indicators
Objective
Sustainable increase in
Council revenue income
Financial
Meet capital receipt
requirement
Delivering new housing
Wider
Corporate
and
Community
Objectives
Performance Indicator
•
Profit
•
Revenue income per annum
•
Gross and net yield by site and asset
type
•
Additional business rate retention
•
Additional New Homes Bonus
•
Additional council tax receipts
•
Annual capital receipt v target
•
Return on capital investment
•
Peak debt requirement
•
New houses built
•
New affordable homes built
•
Supporting local economic
growth
Area regeneration
•
•
•
•
•
Employment floor-space sqm created
per annum
No. of jobs this space will sustain
Additional spending in local
construction supply chain and job
sustainment
Impact on GVA
Unemployment
Investment by area
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2.2
At this stage each project business case would be expected to show
a Capital Return on Cost (capital spend plus land plus finance costs)
at a minimum of 20% per project, and /or an Income Return on
Cost (gross rents less management fees as a percentage of gross
cost) of at least 4% per annum.
Forecast cash flow summaries and KPI summaries are provided in
Para 10 to this Report.
Whilst an industry standard return would be in the region of 20%,
the primary aim of PropCo is for socio economic benefit as well as
commercial rates of return from development. As such it would be
unrealistic to expect PropCo developments to match this on all of its
investments. It is therefore recommended that the minimum
expected return from each development would initially be
discounted down from 20% because of the non-financial
considerations that may be required or taken into account, such as
job creation and stimulating the local economy.
2.3
The benefits which the property investment strategy will deliver
have not yet been factored into the corporate or medium-term
finance strategy, but it is important going forward for the Council to
establish the likely benefits and track the outcomes it expects to
deliver from its investment. Understanding the potential benefit of
developing individual sites will form a key element of the site
options appraisal process as well as helping to inform the relative
prioritisation of development opportunities. This in turn will enable
the Council to quantify the net impact of its strategy.
3.
The County Council’s Management Approach to Property
Investment
3.1
There are a number of ways in which West Sussex County Council
could deliver its investment strategy whether in-house, via a
property vehicle company or arms-length investment in a property
fund. The Council has chosen to proceed by directly managing its
investment activity because:
•
•
4.
4.1
It is keen to maintain transparency over its use of funds for
investment
It wishes to be able to prioritise development activity which
supports corporate and community objectives and may
therefore necessitate compromise on the commercial return
Ongoing Steps
Structuring the Pipeline. The Council has identified key sites
with potential for development. To establish the structured delivery
pipeline of projects, preparatory appraisal, legal and planning work
is or has been carried out for each priority site.
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These are key stages in understanding the development potential of
each site, and the likely costs and other constraints, as well as the
likely timescales involved in the delivery of the benefits. Assessing
site potential enables the Panel to understand which sites offer the
best return and also help the County Council understand the
aggregate benefit the pipeline of sites will deliver. This will be an ongoing process with the pipeline kept under review to take account of
emerging issues.
4.2
High-level market assessments inform the prioritisation of the assets
and the indicative financial returns which could potentially be
realised over a defined timeframe (see paragraph 8.1 below).
Figure 3: Identifying High Priority Projects
4.3
Funding Requirement. The County Council has £36m within its
capital programme and medium term financial strategy to support
the development of sites and to acquire new investments, as may
be identified. High-level financial modelling of cash-flows and
reviews of the peak debt requirement continue. The Plan
acknowledges that the Council may need to re-prioritise
investment, select alternative site development options or consider
ways to mitigate the financial impact.
PropCo will pursue a twin-track approach of developing sites for
revenue generation while also generating capital receipts to sustain
the capital investment fund for property investment, and/or to meet
planning assumptions for wider capital receipts supporting the
County Council’s medium term financial strategy.
4.4
Programme and Project Resourcing. West Sussex County Council’s
property team is small
and seeks to manage the competing demands of the operational
portfolio, its collaborative work with partners as well as Propco
activity.
Taking into account the project delivery pipeline, the Panel is
undertaking a programme resourcing review to ensure that the
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required skills and capacity are identified and a plan for delivering
them is put in place. Issues which it is considering include:
•
•
•
•
•
4.5
ensuring the appropriate span of development expertise (eg
residential);
establishing a programme management co-ordination team;
sales capability and resourcing the downstream landlord and
tenant capacity of an expanded investment portfolio;
establish whether it is value for money to recruit the required
skills in-house or contract for delivery from external parties;
ensuring there is clarity around roles, responsibilities and
accountability for the performance of the property investment
programme.
Performance Reporting. Figure 2 sets out the proposed high-level
performance indicators for the programme and individual projects.
There is also a requirement for financial and contract management
tracking by project including time, cost and performance measures.
It is proposed that a performance dashboard be developed with
common reporting criteria at programme and project level to enable
an understanding of project-specific and aggregate performance.
This will aim to set out the expected benefits profile, establish
target performance and provide status reporting on a rolling basis.
This will enable the Panel to focus its attention on key programme
and project issues.
5.
Clarifying Governance Arrangements
5.1
It has been important to clarify the governance arrangements for
delivery of the property investment strategy, and establish clear
ways of working to support Panel’s terms of reference. The Panel
will:
•
be responsible for overseeing the delivery of the investment
portfolio objectives and will be asked to review annually the
overarching investment strategy and provide guidance on
commercial property policy;
•
monitor progress against performance indicators and ensure
corrective action is identified and progressed where required;
•
agree new projects to be added to the development pipeline;
•
maintain oversight of programme funding, cash-flow, and
project resourcing and provide guidance on programme
priorities;
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•
approve project-specific recommendations on options
appraisals and business cases at three key stages as set out
at Annex A:
o
o
o
6.
High-level asset development review to determine
preferred course of action
Detailed option appraisal and outline business case
Full business case including procurement of delivery
partner
Other Factors to be addressed
Commercial Options for Procurement of Development Support
6.1
In order to develop sites, West Sussex County Council is likely to
require significant development and construction support, as well as
market research, legal and financial advice. Further work is being
undertaken to appraise the benefits of different procurement
approaches including:
a. Frameworks. West Sussex County Council can contract for
development, construction and consultancy support from a
number of frameworks, although residential development is
currently assessed to be an area of weakness in the current
framework coverage available (given existing are more for
public building works.) Access to a national framework of
house builders supported by the Homes and Community
Agency has now been sourced and available- pending any
further decisions to procure a new “local” framework.
b. Ad-hoc Joint Venture. Such an approach would see West
Sussex County Council delivery support on a project by
project basis with the sharing of risk and benefit determined
on the basis of the individual project conditions.
c. A strategic development partner. West Sussex County
Council could opt to compete a multiple-site strategic
development/construction role through OJEU, which would
see a single contractor or consortia selected to lead all
development and construction work. The advantages include
establishing a long-term partnering approach and potential
supply chain efficiency, but may inhibit market competition
on a project by project basis.
6.2
As the proposed programme of projects becomes clearer, the Panel
will continue to assess whether it needs to strengthen its
procurement options (eg. set up a framework for residential
developers) and whether there are any benefits to procuring support
across more than one project.
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7.
Market Analysis
7.1
Market analysis continues to be commissioned at a local level for
each project and serves to inform decision-making by indicating
which asset types are likely to prove realistic and deliverable from a
market perspective.
The market analysis provides an indication of the levels of demand,
values, rents, yields within the local market, in addition to market
trends and sentiments which are critical to understanding the
prevailing and anticipated market conditions. Such information will
also inform decisions on whether to retain assets for revenue
income or dispose for capital receipt.
7.2
Market analysis also enables the Panel to ascertain whether the
returns being delivered are consistent with wider benchmarks in the
property investment sector. It will also need to understand
prevailing and anticipated trends in the market as it considers
where it might wish to procure additional assets and of what type.
This information will then be aligned with local market intelligence
about upcoming opportunities for investment.
8.
Risk, Interdependencies and Constraints
8.1
Programme and individual project-level risks will be identified and
managed throughout development. Risk Registers will be prepared
at programme and project level, monitored and regularly updated.
Each identified risk will be assessed in terms of level of risk,
likelihood of occurrence and mitigation strategy. The Risk Register
will be a live document and risks closed as mitigation action is
completed.
8.2
Risks may include but are not limited to flexibility of procurement,
Right to Buy, S106 Agreements, financial, political, reputational,
environmental, legal, and capacity to deliver. Other constraints
such as highways infrastructure and flood risk may emerge on a
site by site basis.
8.3
In addition there will be a number of interdependencies which will
also need to be considered e.g. the availability of new surplus
assets to develop. Furthermore, market conditions may change
over time and the success of the programme is heavily dependent
upon the economic and property market outlook which will impact
upon market demand, capital values, rents and yields.
9.
Communications, Branding and Marketing Strategy
9.1
A Communications, Branding and Marketing Strategy still needs to
be developed and will be informed by best working practices in
marketing and communication. The plan will be developed to
identify the range of services required (e.g. letting/sales agents,
public relations consultants, brand consultants or legal advisors)
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With the limited size of the current team, it will be important to
establish what additional resources may be required. The Strategy
will also cover such areas as marketing initiatives and launch events
and branding.
10.
Proposed Indicators based on current cashflow
forecasts
Peak debt
£22,885,000
Gross Rental Income by 31st March 2018
£744,000
Return on Cost
Target
project
(Return on Capital Investment plus land and finance)
minimum
20%
per
4%
Net rental yield
(Gross rents less fees, as a percentage of gross cost)
PropCo Cashflow – April 2014
31st
March
2015
31st
March
2016
31st
March
2017
31st
March
2018
£’000s
£’000s
£’000s
£’000s
Net Reserve Position *
2,149
412
-179
-1,594
Capital Expenditure
4,377
9,966
18,184
24,479
Receipt/Dividend
0
0
0
0
Net Cash Position
6,526
10,378
18,005
22,885
Gross Rental Income**
0
80
448
744
*Net Reserve position is what will have been financed through revenue
reserves by year end 2014/15.
**Gross Rental Income and Net Cash position currently assumes a 70/30
split of sales to rental on the Barnham scheme rather than 100% rental at
this stage
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Annex A – Programme Action Plan to Underpin the Property Investment Strategy
Programme Level Action Plan
Feb-14
Programme Governance
Propco Panel Meeting
Performance and Highlight Reporting to Propco
Phase 1
Identify and agree key objectives and performance indicators for the property investment strategy
Establish programme action plan to set Propco up for success
Clarify governance arrangements to support effective working of the Propco Panel
Approval of phase 1 deliverables at Propco Panel
Phase 2
Development Prioritisation
High level market assessment to inform indicative returns
Site asset review to understand high level potential financial/non-financial benefits, potential investment needed, constraints
Structure project delivery programme taking account of ease v benefits against key objectives
Establish forecast aggregate benefit profile
Financial Profiling
Model structured programme to establish forecast cash flow and peak debt requirement
Establish viable funding model and options around investment and returns (eg revenue v capital)
Produce high-level cost benefit analysis
Programme and Project Resources
Identify required skills and capability
Options to meet requirements
Clarify roles, responsibilities and accountabilities
Performance Reporting
Establish programme and project level benefit tracking
Establish programme and project level performance tracking (cost, time etc)
Set up performance monitoring dashboard
Approval of phase 2 deliverables at Propco Panel
Phase 3
Procurement
SWOT analysis of procurement routes available
Identify any actions required to improve procurement options (eg frameworks)
Prepare advice to Propco on procurement delivery models
Market Analysis
Establish understanding of best practice market benchmarks
Set up market opportunity monitoring to support identification and acquisition of future assets
Risk Management
Establish programme-level risk register
Establish project-level risk registers
Marketing and Communications Strategy
Identify requirements
Identify options for meeting the requirements
Approval of phase 3 deliverables at Propco Panel
Mar-14
Apr-14
May-14
Jun-14
Jul-14
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Annex B – Project Approval Points
B1.
This annex covers proposals to establish clear approval points for
the development of individual property sites in accordance with
commercial best practice and standard Green Book methodology.
Getting the analysis right at the outset is important for project
success and the proposed approach is common to both private and
public sector development management.
B2.
The three step process set out in this annex will allow the Panel to
take a structured approach to considering site development options,
and it will be asked to agree recommendations at each stage. The
Panel will be routinely kept abreast of salient projects issues
through monthly performance reporting and highlight reports, but it
is important that a clear and formal process is applied to option
selection and investment decisions by site.
B3.
The options appraisal process is key to ensuring that viable options
are not discounted prematurely and that nugatory work is avoided
on options which are unlikely to deliver best value for money. It
should also ensure that the Council has a good understanding of the
likely value, benefits and risks associated with a scheme before
procurement is undertaken. The procurement stage is designed to
ensure the Council selects the best supplier to meet its time, cost
and performance expectations and that a clear understanding of the
sharing of risk is understood before a contract is signed and project
delivery begins.
B4.
The first stage of consultation is proposed to occur following a highlevel options analysis of the site. At this point, Propco will be advised on:
•
•
•
•
the potential options for the site
which are commercially viable and which should be discounted
an indication of high-level benefits and costs of the options
an indication of which option is likely to be the preferred way
ahead and tested at the next stage
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B5.
On the basis of this advice, the Panel it will be asked to agree the
scope for the next phase of the options appraisal.
B6.
The second formal stage of consultation comes after the completion
of the detailed options appraisal. At this point, Propco will be
advised on:
•
•
•
•
•
•
Confirmation the preferred way ahead will deliver the optimum
return against the Council’s financial and non-financial objectives
Market analysis relating to the site
The precise scheme for use of the site
The likely time and cost parameters of delivery
Key risks and constraints
The proposed procurement route to select a delivery partner
B7.
On the basis of this advice, the Panel will be asked to agree the
proposal to seek a delivery partner to implement the recommended
scheme.
B8.
The third formal stage of consultation comes after the completion of
the procurement process. At this point, Propco will be advised on:
•
•
•
The bids received
The analysis of the bids
The preferred delivery partner and basis for recommendations
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•
•
B9.
Procurement risks and how they will be mitigated
The time, cost and performance envelope for delivery of the
scheme
On the basis of this advice, the Panel will be asked to endorse the
proposed procurement of a delivery partner to implement the
recommended scheme.
Graham Glenn
Valuation and Estates Manager