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Appendix K - The Investment Strategy

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Investment Strategy Report 2021/22

The Authority 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 2020/21 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 Authority 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 Authority is to support effective treasury management activities.

Full details of the Authority's policies and its plan for 2021/22 for treasury management investments are covered in the treasury management strategy (see Appendix J).

Commercial Investments

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

The Council does not currently hold or plan to hold any loans to or shares in other organisations that will provide a commercial investment return.

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 and 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.

Table 1 - Property held for investment purposes in £ millions

Property

actual

purchase cost

£ million

31.3.2019

value in accounts

£ million

31.03.2020

Value in accounts

£ million

31.03.2020

Cumulative
Gains /
(losses)

£ MILLION

31.03.2021

expected Gains
or (losses)

£ MILLION

31.03.2021

Value in accounts

£ MILLION

Agriculture land and Buildings0.6291.1151.0800.4510.0001.080
Ground Leases18.12730.30731.21413.0870.00031.214
Industrial Land and Property4.0955.2175.6941.599-0.2855.409
Retail Property1.1721.6881.5790.407-0.0791.500
Other Land and Buildings1.4771.0190.939-0.5380.0000.939
Total25.50039.34640.50615.006-0.36440.142

 

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 Authority's investment property portfolio has been made within the past twelve months, and the underlying assets provide security for capital investment. Should the 2020/21 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 therefrom.

The Authority 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.

The above table includes a forecast for the potential impact of Covid19 upon future valuations and suggests that there may be some volatility within the Investment portfolio market due to the economic effect on businesses. At present the council has building into its Revenue Budget forecasts the potential loss of rental income.

Proportionality

The Authority aims to achieve profit generating investment activity to achieve a balanced revenue budget.

Table 2 below shows the extent to which the expenditure planned to meet the service delivery objectives and/or place making role of the Authority is dependent on achieving the expected net profit from investments over the lifecycle of the Medium Term Financial Plan. Should it fail to achieve the expected net profit, the Authority has a contingency plan of efficiency savings which it can call upon to continue providing the Council's services.

Table 2 - Proportionality of Property Investments

 

2018/19

actual

£million

2019/20  

actual

£million

2020/21

forecast

£million

2021/22

forecast

£million

Gross service expenditure40.91943.28847.28642.146
Investment Income2.7432.932.9822.891
Proportion6.70%6.77%6.31%6.86%

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 Section 151 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, Cushman and Wakefield as property consultants, 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.

Commercial deals

The Council previously appointed Cushman and Wakefield to undertake a strategic review of the Council's investment portfolio.

The focus of the review was to establish the extent to which the Council is getting value for money from the investment property assets it holds and whether its Property Services function is delivering value for money in its' management.

The Cushman & Wakefield report identified an Action Plan that is currently in the process of being adopted. This action plan set a direction of travel towards divesting low return assets and replacing with higher performing assets in the Preston Area.

The Action Plan included the reuse of capital receipts from asset disposals for future investment; identifying opportunities to grow the portfolio through investments in the Preston area and diversification of the portfolio to achieve performance and reduce risk.

To date a work has been undertaken to review of the managed workshops, carrying out rent reviews and identification of surplus areas of land and freeholds. These works have achieved additional rental income as shown in Table 2 above and could achieve future capital receipts.

The Council undertakes business case analysis of potential investments which are considered at Corporate Management team and elected member budget working groups to consider future developments and income streams that would reduce the current financial pressures on the authority.

In recent years the Council has not acquired any properties for the sole gain of generating a profit or return to contribute to net service costs.

Corporate Governance arrangements ensure that all decisions on Commercial investments are made in line with the criteria and limits approved by Council in line with Financial Regulations and the Constitution.

Funding of Property Investments

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

In recent years the Council has undertaken a roof replacement programme on its Roman Way industrial units at an estimated cost of £1.2m to preserve the life span of the assets and secure and enhance the rental income it receives.

The council is currently is reviewing its property investment programme and has a dedicated capital scheme set aside to fund future capital works up to a set level.

Table 3 - Investments in Property funded by borrowing in £ millions

Investment Property

  • 2018/19 Actual - 0.769 (£m)
  • 2019/20 Actual - 0 (£m)
  • 2020/21 Actual - 0.02 (£m)
  • 2021/22 Actual - 0.05 (£m)

Total Funded by Borrowing

  • 2018/19 Actual - 0.769 (£m)
  • 2019/20 Actual - 0 (£m)
  • 2020/21 Actual - 0.02 (£m)
  • 2021/22 Actual - 0.05 (£m)

Returns on Property Investment

This indicator shows the property 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 4 - Property Investment rate of return (net of all costs)

Investment Property

  • 2018/19 Actual - 5.30%
  • 2019/20 Actual - 5.56%
  • 2020/21 Actual - 5.68%
  • 2021/22 Actual - 5.35%

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