Appendix K - The Investment Strategy

Investment Strategy Report 2023/24

Introduction

The Council invests its money for three broad purposes:

1. because it has surplus cash as a result of its day-to-day activities, for example when income is received in advance of expenditure (known as treasury management investments),
2. to support local public services by lending to or buying shares in other organisations (service investments), and
3. to earn investment income (known as commercial investments where this is the main purpose).

This investment strategy for 2023/24 meets the requirements of statutory guidance issued by the government in January 2018 and focuses on the second and third of these categories.

Treasury Management Investments

The Council typically receives its income in cash (e.g., from taxes and grants) before it pays for its expenditure in cash (e.g., through payroll and invoices).

It also holds reserves for future expenditure and collects local taxes on behalf of other local authorities and central government. These activities, plus the timing of borrowing decisions, lead to a cash surplus which is invested in accordance with guidance from the Chartered Institute of Public Finance and Accountancy.

The contribution that these investments make to the objectives of the Council is to support effective treasury management activities.

Full details of the Council's policies and its plan for 2023/24 for treasury management investments are covered in the the treasury management strategy (see Appendix J).

Commercial Investments

Service Investments: Loans

The DLUHC defines property to be an investment if it is held primarily or partially to generate a profit.

The Council does not currently hold any loans to or shares in other organisations that will provide a commercial investment return. During 2022/23, Council approved a 'loan in principle' of £0.15m to a Community Benefit Society to facilitate the purchase of the freehold of a local music venue, secured against the freehold of the property.

Interest will be charged on the loan in line with the requirement for Local Authorities, legal and financial due diligence checks have been undertaken and an offer outstanding.

Contribution

The Council may lend money to local businesses, local charities, housing associations, local residents and its employees to support local public services and stimulate local economic growth. For example, the Council participates in a Cycle to Work scheme for employees to enable them to hire a bike to encourage them to cycle to work, and as stated above, the Council has approved in principle a loan to a Community Benefit Society.

Security

The main risk when making service loans is that the borrower will be unable to repay the principal lent and/or the interest due. In order to limit this risk, and ensure that total exposure to service loans remains proportionate to the size of the Council, upper limits on the outstanding loans to each category of borrower have been set as follows in Table 1.

Table 1: Loans for service purposes

The Council has not made any loans for service purposes in 2022/23 and has set an approved limit of £0.15m for 2023/24.

The loans amount made to employees are negligible.

Commercial Investments: Property

The DLUHC defines property to be an investment if it is held primarily or partially to generate a profit.

The Council invests in land and property within its boundary with the intention of facilitating economic development and regeneration. These investment assets provide a financial return that produces a profit that is spent on local public services.

The property portfolio in recent years has been subject to an external review by property consultants Cushman & Wakefield to optimise the return achieved and develop an action plan for developing a strategy for the disposal and acquisition of assets to continue to achieve financial returns.

In accordance with government guidance, the Council considers a property investment to be secure if its accounting valuation is at or higher than its purchase cost including taxes and transaction costs.

A fair value assessment of the Council's investment property portfolio has been made within the past twelve months, and the underlying assets provide security for capital investment.

Should the 2022/23 year end accounts preparation and audit process value these properties below their purchase cost, then an updated investment strategy will be presented to full council detailing the impact of the loss on the security of investments and any revenue consequences arising there from.

The Council assesses the risk of loss before entering into and whilst holding property investments by completing due diligence including full business cases and the use of expert external advisors, where necessary.

Compared with other investment types, property is relatively difficult to sell and convert to cash (liquidity) at short notice and can take a considerable period to sell in certain market conditions. The review undertaken by Cushman & Wakefield property consultants has examined and proposed a plan to maximise asset returns through a structured disposal plan to generate funds that may be re-invested in future investment opportunities.

Table 2 - Property held for investment purposes

Note 1: The reduction in the cumulative value of Ground leases is due to the sale of Barry House during 2021/22.

Proportionality

The Council is dependent on profit generating investment activity to achieve a balanced revenue budget.

Table 3 below shows the extent to which the expenditure planned to meet the service delivery objectives is dependent on achieving the expected net profit from property investments over the lifecycle of the Medium-Term Financial Plan. Should it fail to achieve the expected net profit, the Council has a contingency plan of efficiency savings which it can call upon to continue providing the Council's services.

Table 3 - Proportionality of Property Investments

The proportion is the property investment income divided by the gross service expenditure.

Capacity, Skills and Culture

The Council employs professionally qualified and experienced staff in senior positions with responsibility for making capital expenditure, borrowing and investment decisions. For example, the Director of Resources/S151 Officer is a qualified accountant with over 30 years of Local Government experience.

The Council pays for accountancy staff to study towards relevant professional accountancy qualifications and the staff within the treasury team, whom are all qualified accountants, attend treasury seminars and workshops provided by CIPFA and other external service providers. Training is provided to Councillors as part of the financial management training delivered by the Section 151 Officer and more detailed treasury management training to Councillors on the Audit Committee by treasury management advisors Arlingclose Limited.

The Councils appoints external advisers and consultants that are specialists in their field.

The Council currently employs Arlingclose Limited as treasury management advisers, Jonas LangLeSalle (JLL) as property consultants on a major City development scheme. This approach is more cost effective than employing such staff directly and ensures that the Council has access to knowledge and skills commensurate with its risk appetite.

Investment Indicators

The Council has set the following quantitative indicators to allow elected members and the public to assess the Council's total risk exposure as a result of its investment decisions.

Total risk exposure

The first indicator in the table below shows the Council's total exposure to potential investment losses.

The valuation of Property assets takes place at the end of the financial year and information is not currently available to forecast the value of these assets in future years so the forecast value shown for Property in the Table below for later years is the position as at 31 March 2022.

Table 4: Total Investment Exposure

How investments are funded

Government guidance is that these indicators should include how investments are funded. Since the Council does not normally associate particular assets with particular liabilities, this guidance is difficult to comply with. However, the following investments could be described as being funded by borrowing.

The remainder of the Council's investments are funded by usable reserves and income received in advance of expenditure.

Major capital expenditure on investment properties is typically funded through prudential borrowing which is incorporated into the five-year capital programme.

The Council is a major partner in the £45m Animate leisure and entertainment complex but this project meets the definition of Regeneration under PWLB rules and is not considered a commercial investment. Expenditure on investment properties that has been funded by prudential borrowing and which is reported in the table below includes expenditure on car parks and agricultural properties. The Council is currently reviewing its property investment programme and it has managed to reduce the impact of borrowing through the use of capital receipts.

Table 5: Investments Funded by Borrowing

Rate of return received

This indicator shows the investment income received less the associated costs, including the cost of borrowing where appropriate, as a proportion of the sum initially invested.

Note that due to the complex local government accounting framework, not all recorded gains and losses affect the revenue account in the year they are incurred.

Table 6: Investment Rate of Return (net of all costs)

The rate of return on Treasury management investments are increasing due to the rising Bank rate.