Meeting documents

6.1 Objectives

Proper and effective management of assets provide the cornerstone of the AMP. This provides the opportunity to support the Council's corporate and service objectives.

The Council is experiencing pressures on both the revenue budget and the capital programme. Effective challenge and consequent rationalisations will help to ease these pressures through

• release of capital for re-investment or debt reduction;
  
• efficient running costs;
  
• better public service provision by improved property and co-location of services;
  
• property in good condition;
  
• improved property utilisation and bringing together similar uses into the same property, rather than providing them separately;
  
• improved productivity, changes in corporate culture and facilitation of corporate change;
  
• improved delivery of community objectives through the more effective use of property;
  
• innovative strategic procurement.

6.2 Segmentation and Challenge

This AMP envisages all properties being allocated initially to one of the primary portfolios.

Ongoing challenge then takes the form of a rolling 5 year programme to identify underperforming assets and reallocation to secondary portfolios for individual action. Any programme of review will benefit from a structured process which challenges the need to retain properties on an individual basis, by geographical area, by sector or any other appropriate segmentation. Criteria will depend upon the primary portfolio but the following factors will be relevant

• Operational Efficient operation and utilisation

• Revenue Internal Rate of Return (IRR)

Total financial return - ie capital and revenue performance.

• Community assets - strict CIPFA definition. Includes Parks and Gardens, Play Areas etc. describes assets that have no alternative use and thus no value or potential.
  
• Infrastructure assets - strict CIPFA definition. Includes roads, bridges etc. Again there would be no alternative use hence the asset would not be available for reallocation or disposal.

6.3 Possible outcomes

Where a property satisfies the criteria above then it will be retained in the appropriate primary portfolio and brought forward for review during the subsequent 5 year cycle.

Where these criteria are not satisfied however, then the property will be considered for allocation to one of the secondary portfolios for appropriate action. It may be the case however that underperforming assets are not suitable for such reallocation and in these cases there will be little alternative but to retain the asset and mitigate any effects.

The potential outcomes are set out below by portfolio

• Development portfolio - properties identified for redevelopment, ie where potential value exceeds existing use value.
  
• Disposals portfolio - surplus land and buildings. In most cases the property will be available for immediate sale however in certain circumstances it would be appropriate to retain it in the short term to enable greater value to be realised from (eg) the grant of planning permission.
  
• Retain and manage costs.

This whole process is illustrated in the diagram at Appendix 6.

One of the key characteristics of property investments is the opportunity to improve returns through capital investment. The benefits arising from re-investment can be both financial and strategic. The refurbishment of property or the acquisition of strategic property interests could for example, reinforce the Council's landholdings in a specific area, so providing additional levels of control, or improve the fabric of buildings, so maintaining Bath's unique heritage status and attractiveness for residents, visitors and traders. The benefits are also financial from increased rental income, lower financial incentives given to tenants and ultimately higher capital values.

The poor condition of some properties within the revenue portfolio caused by lack of investment in repair and maintenance has deterred high quality tenants from entering into leases, because of the expense and time involved in refurbishing the property before trading. The investment required restricts the range of prospective tenants and thus the potential rental income.

The R&M programme is currently subject to an allocation from the capital programme as is the reinvestment reserve which provides a modest element of reinvestment funds for such purposes.

A system of option appraisal is a mandatory requirement of the CPA assessment.

The development of option appraisal is primarily the responsibility of the Capital Strategy Group within the Council however property based investment and disposal decisions form a large element of this.

The option appraisal will be informed by the challenge process and models developed to assess the performance of properties or groups of properties and the potential solutions identified as a result. Various options can then be identified and evaluated including a system of whole life costing. These options will range from `'do nothing `' to major capital investment in order to achieve objectives.

Whole life costing is an important feature of option appraisal in that it considers the income and expenditure flows over the whole life of an asset taking into account not only initial acquisition costs but also running costs and any residual value or cost.

Ongoing challenge of the occupation of the operational portfolio is facilitated by information gathered pursuant to earlier sections of this AMP. This information needs to be analysed to prepare an objective assessment of the various factors leading to an overall score by which properties can be assessed, compared and appropriate recommendations made. The performance of a property in this portfolio is judged on a combination of quantitative, ie physical, factors and qualitative, ie subjective, factors. A summary of this is represented in the diagram below.

The factors which need to be considered fall into the 2 main headings described above, ie quantitative and qualitative. Within these 2 large areas the following gives an indication of the sorts of considerations that may apply:

a) Running costs.

b) R&M and Condition.

c) Legal Title.

d) Development and Planning.

e) Suitability.

f) Council Policy.

g) Service objectives.

The above factors are weighted and subject to analysis by geographical area, property type or factor. Implementation of the above comprises a joint exercise involving occupiers and the Asset Review team in Property Services.

The model can produce a straightforward score per property however the results also contribute to informed decisions based upon the scores embellished by service needs and any other relevant factors.

Hence a property that is inherently fit for purpose and suitable from the occupier's perspective but in poor condition should be targeted in terms of Repairs & Maintenance and other investment wheras a property in good condition but which is in a poor location or unsuitable for other reasons is unlikely to be retained and consideration should be given to relocation and/or disposal of the asset.

At a geographical or service level these results inform a wider assessment and consideration of a fuller picture of asset performance.

At the completion of any review the options will present themselves as a combination of the results from the model tempered by more overall considerations including political, service delivery, cost and timing. Possible recommendations could include

a) Retain as existing - do nothing.

b) Invest/improve.

c) Amalgamate service areas or properties.

d) Reallocate or rehouse.

e) Dispose of surplus property.

Completed reviews feed back into the service planning process as part of the joint consideration of the asset or group of assets by Property Services and service occupiers.

In contrast to the operational portfolio, the revenue portfolio is judged on financial performance based around an assessment of the Internal Rate of Return (IRR) and whether such IRR is greater than a pre determined hurdle.

The Commercial Estate is held under the provisions of Section 120(1)(b) of the Local Government Act 1972 and gives the Council express powers to acquire land by agreement for the benefit, improvement or development of their area. The Local Government Act 2003 (section 12) also gives a Council the power to invest for the benefit of the area.

Under Section 123 of the 1972 Act, the Council, when disposing of an interest in land for a term of longer than seven years, must obtain `best consideration' unless consent is obtained from the Secretary of State. Some transactions such as the granting of tenancies for not more than 7 years, and licences, are not subject to the limitations of the Act, but the general duty to make good use of the Council's assets still applies.

Current objectives are now formulated around the concept of total financial return. The mechanics of this is known as Internal Rate of Return (IRR) which is the rate of return that equates to a Net Present Value (NPV) of zero taking into account the capital value of the asset, rental flows and all relevant physical and management costs.

The revenue portfolio comprises many different types of property, which each exhibit different characteristics and therefore require differing strategies to maximise performance.

The properties have been categorised into the following groups, although some properties may be represented in more than one category. Each category's main characteristics are as under:-

1. Prime Retail Properties

These properties form, by value, the great majority of properties; they are located along the main shopping spine within Bath City centre of Milsom Street/New Bond Street/Union Street/Stall Street/Southgate Street.

Most of the accommodation provided by these properties is retail space, with small office suites, storage and residential flats located on the upper floors. A further characteristic of these properties is that they are rack rented and have regular rent reviews. National retailers and high street banks occupy very large proportions of the properties.

2. Secondary Retail Properties

The fringe investment properties comprise those situated around the prime investment properties, occupying more secondary retailing locations within Bath City centre. The retail units are predominantly occupied by local tenants and small businesses which are perceived as poorer covenants than national multiple traders by offering less security of income. As with the prime investment properties category the properties are rack rented and reviewed at regular intervals.

Properties falling into this category include those located in Abbey Churchyard, Broad Street, Edgar Buildings, New Bond Street Place, Northgate Street, Saville Row and Walcot Street.

3. Tertiary Retail Properties

This category consists of a number of isolated properties, scattered around the fringe of Bath City centre as well as the centres of Keynsham and Norton Radstock. Many of these properties suffer from low income growth and above average management costs including larger than average void rates. Occupiers tend to be individuals or small private companies.

4. Reversionary Freehold Interests

Reversionary freehold interests exist due to historical reasons but also as a result of the Council's policy of not selling the freehold interest of properties that are integral to the City. There are two forms of reversionary freehold interest, which are identified below:-

a. Where all the income has been sold for many years into the future and there are no provisions for rents to be reviewed. These leases are generally structured so as to limit the Council's influence by permitting the head tenant to deal with the majority of management issues without the freeholder's consent. These are affectionately known as hands off arrangements.

b. Where a proportion of the income has been sold, but leaving a percentage gearing of the rack rental value to be paid to the Council. These leases will usually contain rent reviews at similar intervals to those in the subleases to the occupational tenants. A further characteristic here is that the Council's influence has been retained to a certain extent by structuring the lease in such a way that the Council's consent is required in the normal way for routine management actions. These are known as hands on leases.

One of the beneficial features of these property interests is the potential either to increase the Council's income or to raise capital through the restructuring of these interests, depending on requirements at the time.

The length of long leaseholds can vary, but institutional requirements dictate a 125 - 150 year term. As indicated above the rental arrangements will vary. These leases provide an opportunity to contribute to the requirements of the capital programme within an approved strategy.

5. Offices

The Council owns very few stand alone office properties although many of the retail properties do have a secondary office element, typically on the upper floors.

6. Industrial Properties

Council owned industrial and workshop premises are located throughout the Bath & North East Somerset Council area, providing accommodation on flexible terms to many new businesses. These range from modern starter units at Mill Road in Radstock to small workshops in Walcot Street, Bath. The Council also owns the freehold, therefore maintaining overall, control of a number of larger industrial premises in the Brassmill Lane and Locksbrook Road areas of Bath.

7. Licensed Premises

The properties are scattered throughout the prime and fringe investment properties in Bath City centre. The market for these properties does not necessarily follow retailing patterns. This sector has performed particularly well in recent years and a number of recent developments including The Old Police Station and 23 Milsom Street confirm the demand and the ability to attract major investment in the Council's property.

8. Miscellaneous

The miscellaneous interests held within the Commercial Estate are primarily low value, broadly spread throughout the area. They have limited scope to be managed actively and tend not to contribute to the fulfilment of the Council's objectives. Management costs themselves are very high and by applying assessment criteria robustly returns will diminish, however disposal also demands significant resources.

Many of these interests are rentcharges and fixed ground rents of residential and non-residential premises.

Asset Review in relation to the revenue portfolio includes the following stages

• An ongoing assessment of the current objectives.
  
• Analysis of the mix of properties within the portfolio to enable individual strategies to be formulated. Each property category will have different characteristics that require different considerations.
  
• The construction and implementation of a Property Performance Model (PPM) to carry out an analysis of total financial return.
  
• Ongoing reassessment and review of properties either individually, geographically or by sector/category.
  
• The creation of a re-investment mechanism to provide resources for projects to improve the estate as a whole.

A key part of the strategy is a Property Performance Model (PPM). The model will have two purposes:-

• To provide an objective decision making framework for comparison of properties in order to analyse the costs and benefits of holding a non-operational property portfolio.
  
• To provide a basis for year-on-year measurement of the past performance of the portfolio. This is particularly important in connection with the development of a suite of KPI's in this area.

The PPM will essentially comprise two levels of assessment.

Level 1:

An analysis of the current and projected income streams using a discounted cashflow approach. The resulting IRR will then be compare against a benchmark or hurdle rate. Appendix 5 gives a fuller explanation of the IRR technique.

Where an asset exhibits an IRR above the benchmark or hurdle it will be retained and brought forward for reassessment in the next cycle.

Level 2:

All properties that do not achieve the primary financial benchmark will need to be considered further in the context of the Council's wider service and strategic objectives. This will include an examination of whether an asset should be retained, improved, appropriated or sold.

Depending on the outcome of this further examination properties may be reallocated to one or other of the secondary portfolios