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Local authorities are major land and property owners, with the benefit of planning and economic development powers. These have often pieced together over decades and been influenced by a variety of events. This can include war bomb damage clearances, the merger of neighbouring authorities, acquiring properties for road-widening schemes (which never took place), or donations/gifts by wealthy landowners. This has led to an incredibly mixed public estate often containing assets of historical and political significance which can be sensitive due to community attachment and involvement.
The following (accounting) definition helps to shed light on the issue: ‘An investment property is used solely to earn rentals or for capital appreciation or both’. On this basis an investment asset has no intended wider community, social or economic role. In reality, having regard to this narrow definition, the pure investment assets could in fact form a relatively small proportion of an authority’s estate.
So why do councils hold such properties? The reasons are varied and are often tied up with a series of historical events. However perhaps a key one relates to strategic control in a town centre or a designated regeneration area. Owning a piece of freehold (or long leasehold) within the red line boundary of a proposed redevelopment scheme gives a council a sense of control over how an area develops, over and above planning control. It can also provide a real seat at the table when negotiating financial, planning/design and phasing/timing issues of future development with private sector partners.
Retention of commercial interests also gives councils an opportunity to flex their economic well-being powers through direct intervention in supporting and stimulating activity where there is market failure and indeed, where appropriate, offering preferential lease terms in order to incentivise tenants and new businesses to locate to a particular area. In addition to town centre ownerships, another reason could relate to a council’s strategic housing delivery objectives where it is prepared to retain land to deliver an affordable led scheme rather than selling it for ‘top dollar’ to the highest bidder.
When dealing with these type of assets, a healthy degree of leadership and ownership will be needed in order to help shape the future direction and purpose of the estate. Depending on departmental and political structures, councils obviously deal with this in different ways however it is not uncommon for a reorganisation or restructure to ‘blur’ the decision making process and for an asset to effectively fall between the crack into a black hole!
Whatever the strategic objective for any particular asset or group of assets, tour authorities should be capable of knowing why it has them and measuring performance and achievement. Given the type of uses involved here rental return or capital appreciation are not sufficient indicators of success.
Notwithstanding that these assets are generally held for community reasons there is often a significant cost attached to holding them. This is particularly the case if leases were granted at a nominal or discounted rent with internal repairing obligations. And it is not uncommon for tenants in addition to receive a council grant.
The financial sustainability measure will be of particular interest, as this underpins everything else. But it is not an outcome in itself. Through liaison with the tenant, we can gain a better understanding of the organisations’ financial position including reserves (and access to grant funding where applicable) to maintain the facility into the foreseeable future. Issues such as an organisation or club’s approach to maintenance and repair together with any future plans for investment to grow the membership base or upgrade/extend the building should all have a bearing on a council’s approach to management.
At the end of the day these tenanted assets are always likely to form a part of a council’s estate. However we need to be aware that just because it is a property asset, the use conducted within it can be more important than the outcome of a rent review or lease renewal. Where resources are stretched and priorities seem to revolve around maintaining the bottom line it is arguably more important than ever that there is transparency around why we retain these assets and the outcomes generated from the various arrangements in place – whether they be economic or social.
As responsible estate managers or asset managers our role is to bring challenge and in the current financial climate there could be no better time to do it. We need to sometimes push our organisations to question the status quo and ask the important questions: